Samsung Galaxy Note 4 faces tough competition

Yesterday, Samsung launched the $1,150 Galaxy Note 4 in New Zealand. Despite its high-end features, the Note 4 didn’t generate much local media coverage.

This highlights a challenge for Samsung. It’s not that Samsung phones lack innovation; they’re state-of-the-art. But they’re up against increasingly competitive, lower-cost phones from China.

Competitors can produce similar devices at lower costs, putting pressure on its profit margins.

A market leader with shrinking margins

Samsung still sells more phones than any other company, holding the largest market share. Yet, its phone business yields little profit. Just last week, Samsung warned investors of a nearly 60 percent drop in profits, with its phone division potentially running at a loss.

This situation echoes the struggles of former market leaders like BlackBerry, Sony, and Nokia, each of whom was eventually disrupted by challengers. Ironically, Samsung once led that wave of challengers.

Struggling for differentiation

Samsung’s problem is that its phones are no longer sufficiently distinct to stay ahead. It depends heavily on Google for key elements, such as software and services, which leaves Samsung on equal footing with all Android-based competitors.

Apple disrupted the market with the iPhone. Google’s Android gave other manufacturers—including Samsung—a fast-to-market, cost-effective alternative. But Samsung’s rivals access that same Android technology at the same low cost.

A commodity market

Without unique software and services, a phone is a commodity, a market where the lowest-cost producer typically wins. As low-cost competitors undercut Samsung’s prices, the strength of its brand is also under threat. Samsung spends heavily to position itself on par with Apple, yet it must compete against budget brands offering similar devices.

This pricing pressure squeezes Samsung’s margins. In a commodity market, the lowest-priced competitor usually prevails.

Apple’s Premium Edge

Consumers are willing to pay Apple a premium for the tight integration of hardware, software and services. Apple stays out of the low-margin market share battle, a contrast to Samsung’s approach.

Samsung’s attempts to differentiate through content deals, OS overlays, and bundled apps often backfire, creating a clunky user experience. For many, a $1,000 Galaxy S5 feels on par with a $400 Nexus 5. Eventually, consumers are likely to catch on to this parity.