With a 30 percent year-over-year drop in mobile revenue and a near 20 percent profit fall in the second quarter, Samsung appears to be in trouble.
Investors responded to the news yesterday by hastily selling off the company's stock. Samsung's stock fell 4.5 percent since the earnings announcement, losing around $7.5 billion of its market cap, according to the Wall Street Journal.
Samsung gave us a preview of the dire quarterly numbers earlier this month, and even then it seemed like a clear warning sign for anyone who wanted to get into the smartphone industry.
The Korean electronics giant pointed to a few possible reasons for the massive quarterly decline, including an overabundance of smartphone stock, stronger competition, and the fact that its second quarter earnings are typically a bit weaker compared to other quarters. Still, the massive decline in performance from last year is worrisome.
Samsung tried to assuage investor fears by hinting at two upcoming smartphones in the next six months: another big-screen model (likely the new Galaxy Note) and one being made with "new materials," according to the company's mobile SVP, Kim Hyun-Joon.
Unfortunately for Samsung, I don't think many people expect anything truly revolutionary from those upcoming devices -- and that's one of its biggest problems right now. The company rose to the top of the mobile industry by filling a vacuum for high-quality Android handsets, but the mobile situation today is far different from what it was a few years ago.
Samsung needs to do something different, or it needs to come to terms with the fact that it won't be the world's biggest phone maker (by volume of shipments) for much longer.
Here are a few reasons it's going to be a tough next few quarters for Samsung:
Xiaomi -- which coincidentally launched its first phone around the same time as the Galaxy S3 -- is finding success by creating high-end phones in China that also cost around $200 and $300 without a contract.
Xiaomi's newest phone, the Mi 4, even includes a stainless steel metal frame, something Samsung still hasn't implemented. Xiaomi also holds 11 percent of the Chinese smartphone market, while Samsung holds 18 percent, according to statistics from Canalys. We can expect to see even more low-cost competition like Xiaomi (the $299 OnePlus One comes to mind) this year.
Going cheap could still hurt mobile profits
Even if Samsung manages to deliver cheap-yet-powerful phones for China and other markets, the company will still find it tough to maintain the strong profit growth it's seen over the last few years. Last fall, for example, Samsung reported a record $9.4 billion in profits.
Lower prices mean lower margins -- Samsung will have to figure out a way to sell a ton of cheap phones to make up for selling fewer expensive phones. And at this point, Samsung has little choice but to eventually go cheap.
In China, Samsung says it will bring down some features from its high-end phones to new low-end and mid-range models. (Those devices will still offer big screens, naturally.)
But since then, Samsung has struggled to find success with any of its new products. Its Galaxy Tab slates were noble attempts, especially the Galaxy Note line, but they never saw the adoption that the Galaxy S3 did. And the Galaxy Gear proved that Samsung basically has no clue how to enter a new market without following in the footsteps of a more innovative competitor.
The Galaxy S5 was a sign that Samsung is finally focusing a bit more with its products rather than trying to cram in a ton of features that nobody will use. But the company needs to prove it can innovate consistently if it wants to remain a mobile leader.