Two of the major personal electronics giants have had an interesting year. Apple's smart-watch business never took off, though that's an industry-wide phenomenon, and the expected new i-Phone 7 release turned into a minor polishing of the i-Phone 6. Add to that, indications are that we may have a peaking smart-phone market, while Apple is no longer far ahead of competition on features and looks.
In Apple's case, these are warning signs to Tim Cook that the company has to reinvent itself if it wants to stay competitive, never mind grow. Apple has a huge war-chest but hasn't yet shown much sign of using it for either organic growth or acquisitions. Being something of a one-trick pony, with the i-Phone as the market cash cow could put them in Samsung's shoes very easily.
Samsung has a critical quality problem. A series of spectacular fires in the new Galaxy Note 7 has forced a recall of all 2.5 million units sold. That would be bad, but there are now reports of batteries burning up on replacement phones, too.
The Note 7 problem is severe enough that the FAA is considering a total ban of the phone model, while two of the three major cell carriers in the US have dropped the model from sales and made offers to replace any units already sold.
That doesn't bode well for Samsung's phone business, but the whole mess is compounded by a series of exploding Samsung washing machines. A poorly designed frame bracing system fails under heavy spin loads and the spin drum causes the washing machine to come apart. Following on the phone failures, Samsung's brand is under a huge cloud. One of the results of the open economies we enjoy today is that this is a worldwide problem for Samsung.
It's indeed unfortunate that Samsung missed going the extra mile in engineering and quality management needed to protect consumers, since both the phone and the washer are otherwise leadership products in their class. Many prefer the Galaxy family as a cost-effective alternative to the high-priced Apple phone, since both types of phone are similarly featured today. Furthermore, the washer wins in many categories, including the higher load capacity that has led to the disintegration problems.
The washer story will probably sort itself out, and if this was all the damage to the Samsung brand it would be a blip in the market, though it would certainly slow down Samsung's penetration of foreign durable goods markets. The Note 7 issue is much more visible, with TV footage of burnt phones and evacuated aircraft. In the market of even a couple of years ago, this would hurt some, but there are signs that smartphone sales are peaking, heralding a move to competitive selling and perhaps a price war.
A loss of brand status in these circumstances is a bit of a disaster. Samsung has plenty of competitors snapping at their heals, from LG to a host of Chinese companies, so being out of the market for perhaps 6 months while the problem is resolved, and then having to rebuild the brand, opens up the risk for customers and cellular companies to move on. This seems to be happening, with both ATT and T-Mobile in the US already discontinuing Note 7 sales and the other carriers stopping replacement with Note 7 models.
Samsung has just reacted to the product problem and the market issues by shutting down production of the Note 7. That will leave a substantial supply gap to be exploited. Let's consider impacts. The US total accessible market for the Note 7 is going to be split among Apple and the Galaxy wannabees in the market. These Galaxy competitors all use Android operating systems and are as a result similarly featured to the Note 7.
The split is more likely to favor the lower cost Note competitors, which reflects the value proposition of the Note 7 as “Apple features without Apple prices”. The opportunity to grab a large part of the market, at least for a while, probably will trigger something of a price war, as each vendor tries to grab the lion's share of the loot.
That's good for consumers, but perhaps not so good for Apple. With a weaker than usual position because of the lack of real innovation in the i-Phone 7, Apple may see erosion of its otherwise loyal base as the price gap opens up. The value of a “bling” sell can only be stretched so far, especially if the customer is on a fifth or sixth round of buying for bling's sake. There are signs that Apple is starting to get price conscious and this may well lead to a significant price cut in the near future.
Such a price cut might come in the form of a cheaper model, though it isn't clear what features would be given up to justify a lower price, given that new Android phones are a close feature match. Doing this might actually increase Apple market share, though they have to react well before Samsung returns to the market.
Samsung's major tumble just as we are entering the phase of low technical differentiation and flattening sales is going to hurt them badly, especially with the super-loyal fans who signed up for the first available phones. Whether they can recover or not will depend on the aggressiveness of the Android competitors and Apple is not immune to some downside risk while this is happening.