Apple Has Forced a Huge Change at Samsung

The end of the war was dramatic, although it was months coming: Samsung reported a staggering 20 percent drop in sales and an even worse 49 percent collapse in its profits because its flagship Galaxy S5 phone saw big declines in the latest quarter.

The reason: Consumers held off buying them ahead of the launch of Apple's iPhone 6 and iPhone 6 Plus phones in September in big-screen sizes that competed directly with the Galaxy S5 and the Galaxy Note 3 and 4, Samsung's other giant-size high-end models, the Financial Times says.

Now, Samsung has made a major shift.

It unveiled two phones Thursday night, the Galaxy A3 and A5, that are both "mid-range" devices with metal bodies. They look a bit like iPhones, but they will probably be priced cheaper.

And the price is key: Samsung is basically saying it suddenly got a lot harder to compete against the iPhone on high-end prices with top-flight models, so it must compete instead against cheaper low-end Android manufacturers like China's Xiaomi by offering quality devices at reasonable prices.

It might be good business, but it must be painful for Samsung.

Employees are probably delighted over at Apple, too.

For years, Apple stayed away from the big-screen phone category, apparently in the belief—as founder Steve Jobs once said—that Apple's small 3.5-inch and 4-inch iPhones were just the right size for consumers because they could use them with one hand.

That was Apple's big mistake: Consumers did want big phones, and Apple basically ceded two years or more of big-screen sales to Samsung.

In 2013, Apple finally realized that big screens were driving growth in phone sales. And in September this year it launched two phones to address that. That move appears to have killed off much of the demand for Samsung's big phones.

Samsung execs acknowledged it on their earnings call, per the Financial Times:

'Our high-end smartphone sales result was somewhat weak,' Kim Hyun-joon, a senior executive at the IT & mobile division, told analysts on a conference call.

Samsung's problem now is that it is being squeezed in the middle.

The company has a huge range of cheap, low-end Android phones that yield big sales (as free wireless contract upgrade phones, for instance) but small profit margins. Chinese Android manufacturers have been gutting that business by making super-cheap Androids that are actually nicely designed and quite good. Xiaomi is probably the most fascinating phone company on the planet right now, with its unbelievably cheap Androids that have superior design.

Western consumers will be shocked to know that Xiaomi is now the third-largest phone manufacturer by shipment volume worldwide—and it hasn't even started selling phones in the West!

Xiaomi stole Samsung's low-end business, in other words, while Samsung was trying to solidify its lead as the high-end big screen leader.

Now it looks as if the market is moving away from Samsung in the high-end war with Apple. It will probably continue to supply its flagship Galaxy S5 and Note 4 phones. (They're great phones by the way; I've tried them both and prefer them to iPhone.)

But Samsung's new fight must now be based on price and quality in the Android market, not the iPhone market.

-slate.com