Why Apple is beginning to fall behind

 
Image courtesy of Digitaltrends

The extremely profitable Apple, whose net income rose from $8.24 billion in September 2009 to $41.73 billion in September 2012, has finally experienced a profit loss during the first quarter of this year; the company earned 16% less than it did in the same quarter a year prior, and 27% less than the latest quarter of 2012. With Samsung hot on its heels, the entire dynamic of the mobile phone market may shift in the near future. The question that arises is: Why is Apple losing market share if the company’s net income is so high?

Apple's primary products and services are related to consumer electronics, software, and communications. The company relies heavily on innovation to stay ahead of its competitors ― it does not have the luxury of a diversified portfolio of products and services the way Samsung does, whose subsidiaries include Samsung Heavy Industries, Samsung Petrochemicals, Samsung Fine Chemicals, and Samsung Life Insurance, to simply name a few.

Research & development Budgets
With that being said, Apple’s yearly R&D budget does not reflect the urgency placed on innovation compared to its competitors. The company's R&D budget totaled $3.38 billion in 2012, $2.43 billion in 2011, $1.78 billion in 2010, and $1.33 billion in 2009.

By contrast, Samsung’s R&D spending was $10.47 billion in 2012, $9.04 billion in 2011, $8.26 billion in 2010, and $6.71 billion in 2009, significantly higher than Apple's.

New product launches: Apple’s frequency versus Samsung
Apple releases an updated version of the iPhone, one of its flagship products, on a bi-annual basis. In between the two-year lifecycle, the company produces the S-version version of the latest model ― essentially a hardware upgrade in the form of a faster processor and better camera.

Samsung’s Galaxy series mobile phone line updates much more frequently. The popular Galaxy S3 was released last on May 29 2012, with the Galaxy S4 almost a year later on April 27, 2013. Within this time frame, the Galaxy Note II was released. That’s a total of three flagship products in one year alone versus Apple’s one flagship per year.

The lengthy one-year increment between iPhones gives competitors ample time to innovate their own products beyond the specs of the latest iPhone, thereby challenging consumers to choose between brand loyalty or “the latest and greatest.”

iPhone versus Samsung Galaxy sales figures
Examining the iPhone versus Samsung Galaxy smartphone sales figures below, we observe that the iPhone clearly outsold the Galaxy every single quarter between September 2010 (when the Galaxy line first launched) and December 2012.

Take a closer look and you’ll notice the discrepancy between the two brands has steadily decreased, with the exception of December. By this point, the Galaxy S3 is approximately four to five months older than the recently launched iPhone 5; the Galaxy Note II launched in September is considered more a niche product. 

 
Chart provided courtesy of Barron’s. Source: Samsung, Apple, Raymond James estimates.

Bear in mind that the data depicts the sales figures of only iPhones and Samsung Galaxy phones. Including the Galaxy line, Samsung sells a total of 140 phone models fit for any budget or niche. Apple’s portfolio, meanwhile, is limited to the iPhone 3G, 3GS, 4, 4s, and 5.

iPhone 5 vs Samsung Galaxy S4
Now that the Samsung Galaxy S4 was released on April 27, 2013, the second-quarter figures for 2013 may once again reflect the shrinking divergence between the two brands, given that the iPhone 5 is now six to seven months older. Already the iPhone 5’s hardware has been surpassed. 

 
Graph courtesy of Businesswire.

Worldwide sales
The 2012 worldwide sales figures on all phones, smart or otherwise, indicate Apple’s market share percentage increased by 2.6% between 2011 and 2012 while Samsung’s increased by 4%.
What’s more, Apple has shipped 135.8 million units globally while Samsung has shipped 396.5 million. If this trend remains the same, the disparity between the two companies will further increase.

So why is Apply falling behind?
Clearly the lack of innovation and reliance on past momentum is one possibility. Competitors have caught up and overtaken the iPhone in many regards, both in consumer perception as well as from a technological standpoint.
By all means, we are excluded from the secrecy of the company’s R&D department, and cannot speculate on what sorts of innovations are now in the works. However, what is obvious is that we as consumers crave change. If the operating system of the iPhone 6 sports the exact same interface of its 2007 3G predecessor, but with improved hardware, consumers may become bored with the line as a whole. For comparison purposes, iOS’ major competitor, Google’s Android OS interface, evolves with each subsequent version.

Additionally, the almost symbiotic reliance on iTunes is archaic and runs counter-productive to the scope of the iPhone, which boasts convenience and ease of access as one of its major strengths. iTunes is not convenient and makes transferring content onto the phone a hassle considering its competitors allow a simple drag and drop into the appropriate folder. There is nothing complicated about moving MP3’s into a folder marked “music.”

Healthy competition breeds innovation
The resources for promoting advancement are available to Apple, so it’s only a matter of motivation. Samsung’s growing popularity in the Smartphone sector is a wake-up call that Apple must look to the future to stay competitive and not simply rely on its past reputation.