Comparisons of Samsung and Apple are inevitable; the two behemoths of the smartphone industry capture 27.8% and 19.9% of the global market respectively, which adds up to a staggering 47.7% of the total market (based on the latest numbers from TrendForce released on April 16, 2015). Huawei, the third largest manufacturer, captures a meager 7% of the global market. Samsung and Apple are also the flag bearers of two very different ecosystems, Android and iOS, which makes the comparison incredibly alluring for both Android and iOS enthusiasts (Samsung and Android should not be conflated; however, Samsung leads all Android manufacturers in terms of sales by a significant margin, which, in a sense, makes them its flag bearer, and much easier to compare to Apple than other manufacturers). Now that Samsung has finally released their Q1 2015 earnings a burning question has emerged from the company's latest numbers: how does Apple make nearly five times as much profit as Samsung while shipping just over half as many devices? To answer to this question we must delve into the companies' latest numbers and overall strategy.
Comparing Apple's and Samsung's Q1 earnings highlights a stark difference between the two companies that is not obviously apparent due to our tendency to focus on flagship devices. In Q1 Apple's mobile division (iPhone) generated $40.28 billion in revenue and $11.2 billion in operating profit from 61.7 million shipped units. Samsung's mobile division generated $24.1 billion in revenue and $2.5 billion in operating profit from 99 million shipped units. Here is where things get interesting: Apple's profit margin was 27.8%, whereas Samsung netted 10.37%. If we break down the numbers further we start to see the crux of their differing results, which makes sense when you consider the portfolio of devices each company offers. Based on revenues of $40.28 billion and 61.7 million shipments the average handset generates $652.84 for Apple. In stark contrast, performing the same calculation using Samsung's latest numbers indicates Samsung earns $243.43 per device. In other words, Apple has Samsung licked in the ludicrously profitable high-end market (more on that later); while Samsung's diverse range of devices span the low to the high-end, which reduces the revenue they generate per handset and in turn their profitability.
Official statements from Samsung lend support to this conclusion. In Samsung's Q1 earnings report they mentioned that demand for their flagship Galaxy Note and S lines were relatively soft, whereas demand for their mid-range Galaxy A line was much stronger. Considering the recently released Galaxy S6 and Galaxy S6 Edge, which have sold well thus far and are expected to reach 55 million units in sales by year-end, have yet to impact quarterly results the gap in profitability per device could reduce in the coming months. Comparing Samsung's second quarter and Apple's fourth quarter, following the release of their respective flagships, might lead to much different results. That being said, Apple still has a leg-up on Samsung in the high-end market. Analysts estimate the iPhone 6 costs $240 to produce, whereas the Galaxy S6 costs $290 to produce. The Galaxy S6 is also $56 to $65 cheaper for consumers than the iPhone 6, which results in a $106 to $115 loss in profitability for Samsung. Therefore, even if the Galaxy S6 does exceptionally well Samsung has to sell a lot more flagships than Apple to make the same amount of profit.
Some business analysts, investors, Samsung fans, and Android enthusiasts might lament Samsung's significantly lower profitability than Apple. However, Apple's profitability aside, Samsung is doing incredibly well in 2015 thus far. In the first quarter they recaptured a significant amount of market share from Apple that they lost in 2014; by the end of 2014 Samsung and Apple were nearly tied in terms of market share, now they are leading by a significant 7.9% – more than third place Huawei's entire market share. They also netted $2.5 billion in profit – it is not as if Samsung is losing money. They managed this accomplishment prior to the release of the critically acclaimed Galaxy S6 because demand for their mid-range devices was very strong; sales of flagships will undoubtedly increase. It is also important to note that Samsung's diverse lineup of smartphones, while less profitable, is great for consumers. No matter what your budget is, Samsung has something to offer you, unlike Apple, who also expects consumers to pay more money for a phone that costs less to produce than their competitors. In-depth comparisons of Apple and Samsung are very interesting and entertaining. However, at the end of the day both companies produce products that consumers love, they both make a lot of money, and neither of them is going bust anytime soon. That's just the way it is – the rest is just splitting hairs.