Friday, January 25, 2013

Why Record Sales are a Problem for Apple, Samsung, AT&T and Verizon

The fourth quarter of 2012 was significant for the smart phone business. Apple, Samsung, AT&T and Verizon all had record quarters, where it comes to smart phones. 

Samsung earned record profits in the fourth quarter of 2012, lead by smart phones sales.

Apple reported record financial results in the fourth quarter of 2012, driven by sales of iPhones.

Separately, AT&T sold a record number of smart phones in the fourth quarter.

Verizon reported record smart phone sales as well, in the fourth quarter of 2012.

So you see the pattern: smart phone sales have grown dramatically in the U.S. market, a pattern one can see in other markets as well. But good news can the precursor for bad news down the road, as paradoxical as that sounds.


Virtually all observers will concur that revenue growth in the communications business now is lead by the shift to use of smart phones, which drives mobile data plan revenues. But all observers would also agree that growth will saturate, eventually.

And record sales only bring that saturation point closer. And the crucial question is what comes next, as the industry revenue driver? But there are more immediate questions, as well.
How much more time do rival suppliers really have to establish market share, when Apple and Samsung, which already earn most of the profit in the smart phone business, are possibly widening their already substantial lead in the market? The question probably is most salient for Research in Motion and Nokia.

There are profit margin issues as well. Both AT&T and Verizon reported that subsidies for smart phones, notably the Apple iPhone, were a drag on earnings. So the carriers have a mixed business interest, where it comes to the iPhone. The device drives consumer data plan adoption, but also carries the highest subsidy costs, and therefore hits earnings the hardest. 


The service providers would, in one sense, welcome a hit phone that did not cost so much, in the way of subsidies. The Galaxy is the closest example of that. On the other hand, neither do the service providers want to give one more supplier greater power in the ecosystem, either.

While welcoming Android for providing choice and competition for Apple, service providers likely also want to ensure that Android, in turn, has competition.
And despite the record profits, Samsung also warned that profit margins would be an issue, as marketing expenses are climbing.  Apple’s earnings growth and profit margin also emerged as issues in the fourth quarter of 2012.

The strong smart phone sales trend also means saturation will be reached “faster” in developed markets. And though forecast rates of growth also are high in developing markets, there will be retail price issues to be confronted by both Apple and Samsung.




That would suggest there is reason for the warnings about profit margin. One has to expect that, as the smart phone 
sales battle shifts to the developing regions, unit prices will have to fall. Typically, as sales of devices shift from developed markets to developing markets, gross revenue growth slows, and profit margins contract.

So, oddly enough, record smart phone sales are hastening the day when "what do we do next?" becomes a very-practical question for executives trying to drive the next quarter's revenue and profit margin numbers.


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