WSJ-Is Apple Losing Its Cool?

OBJECTIVE

Explore how a business differentiates itself and improves its market position

OVERVIEW

Samsung, the South Korean electronics giant, is succeeding where other technology companies have tried and failed: closing the coolness gap with Apple.

REVIEW

Read the article “Is Apple Losing Its Cool?” and answer these questions:

1. How did Samsung and Apple fare in terms of global market share last year?

2. How is Samsung able to sell its smartphones for less than the iPhone?

3. According to Ken Yarmosh, how have priorities changed in the development of apps market changed  in recent years?

Getty Images

A display for the Galaxy line, which has powered Samsung’s big gains in smartphone market share.

BY IAN SHERR AND EVAN RAMSTAD

Samsung, the South Korean electronics giant, is succeeding where other technology companies have tried and failed: closing the coolness gap with Apple.

The company has used a combination of engineering know-how, manufacturing strength and marketing savvy to create smartphones that can rival the once-dominant iPhone in both sales and appeal.

In the fourth quarter of 2012, Samsung’s profit surged 76% to a record high on the strength of smartphone sales, including its Galaxy S line. The latest version is considered comparable by many shoppers in both design and technical features to the newest iPhone. Apple, meanwhile, reported flat profits for the same quarter. The company’s stock is down sharply from its peak in September, just two days before the iPhone 5 launched.

At that time, Samsung had just unleashed an aggressive marketing campaign, including a television commercial that mocked the iPhone 5. “The next big thing is already here,” the ad said, referring to its Galaxy S III phone.

The ad was part of a more than $200 million U.S. marketing blitz that Samsung launched in 2011 to poke fun at Apple. The campaign swayed consumers including Will Hernandez, an iPhone owner who bought a Samsung Galaxy S III smartphone a few months ago after seeing Samsung’s ads.

“If you see this stuff on TV enough, it gets you thinking,” says Mr. Hernandez, a 34-year-old resident of Somerville, Mass., who adds that he likes how his Galaxy has a larger screen than the iPhone. “Now, when someone gives me an iPhone to look at a picture, it looks so tiny.”

COST ADVANTAGE

The marketing assault is helping Samsung stretch its lead in the world-wide market for smartphones. Samsung is estimated to have held 28% of the global smartphone market last year, up from 20% a year earlier, according to IHS iSuppli. Apple’s share, meanwhile, edged up to 20.5% in 2012 from 19% a year earlier.

While many analysts agree that Samsung isn’t as innovative as Apple in terms of design and software capability, it has been able to match other electronics companies’ products at a lower price. Samsung’s high-end smartphones are priced similarly to comparable iPhones in the U.S. But Samsung’s devices have been significantly discounted at times, to less than a quarter of the sticker price in some cases.

One reason Samsung can sell its products for less is its cost advantage. Samsung owns its own factories, where it builds screens, chips and other parts. Apple designs its own devices and some of the technologies it uses, but it relies on other companies, including Samsung, to supply parts and assemble its iPhones.

And while Apple has stuck to one new model each year with a narrow price band, Samsung has released multiple smartphones in various shapes and sizes and with features such as larger screens. Its latest, the Galaxy S 4, is being rolled out this month.

Samsung’s surge in smartphones has caused more than just consumers to switch away from Apple. Some app developers have said they are now focusing more attention on Samsung devices. Ken Yarmosh, chief executive of Savvy Apps in Washington, D.C., says his company began by making apps for Apple’s iOS operating system but lately has been focusing on Android as Samsung devices have become more popular.

“There was a major flip: It was Apple, then if you have money build for Android,” Mr. Yarmosh said. “Now it’s Android first, or Android only.

The intense competition has led to skirmishes between Apple and Samsung. In August, a federal court sided with Apple in a fight over patents, awarding it more than $1 billion in damages and saying Samsung had infringed many of Apple’s patents; that award was later reduced. The two companies are also dueling in numerous courts world-wide over various other patents, including the design of their respective devices and the wireless technology that powers them

Despite the threat from Samsung, Apple still sold a record 47 million iPhones in the fourth quarter of 2012, and the two largest U.S. carriers, AT&T and Verizon Wireless, said the majority of smartphones activated over the holidays were iPhones.

“Most people I know have iPhones,” says David Barnard, founder of App Cubby, which makes utility programs for Apple devices. The iPhone’s popularity is not what is at question, he added, but rather that Samsung has taken a smart tack by attacking Apple’s hip image. “Painting the iPhone as a passé thing is such a perfect marketing message
to counteract its coolness,” he says.

SOUTH KOREA’S TOP SELLER

Samsung executives began taking aim in 2009 after Apple began selling the iPhone in South Korea, where it briefly became the top seller of phones in the country.
A year later, Samsung unveiled its answer to the iPhone, the Galaxy S, an Android-based model that had several distinctive features, such as an FM radio, a front-facing camera and a bigger screen.

When Apple released its iPhone 4 in mid-2010, it far outsold the Samsung product, but the Galaxy S had made a mark and was on the radar of Apple’s leaders.

In 2011, Samsung rolled out Galaxy S II and then flooded the market with smartphones.
It put Galaxy S models at the high end and created four more lines—such as the Galaxy M—each with numerous models. Samsung took another step last year by adding a new line called Note, a cross between a smartphone and tablet.

Samsung’s latest efforts seem to be paying off, at least with consumers who aren’t so loyal to Apple.

Dora Daniels, 26, of Oakland, Calif., says she learned about Samsung’s Galaxy S III because of giant ads plastered around a downtown San Francisco transit station.

“It’s silly because I don’t want to be a slave to marketing,” says Ms. Daniels, who recently switched to the Samsung phone from an older iPhone. “But it really got into my head.”