Apple's Achilles' Heel: Samsung Has An Arrow Pointed Straight At It

 |  About: Apple Inc. (AAPL), SSNLF, Includes: S, T, VZ
by: Heisenberg Principle

As most everybody knows, the iPhone has been the most successful product from Apple (NASDAQ:AAPL) since the company's founding and currently represents over 50% of their sales, growth, and profits. Part of the reason for this popularity and dominance has been its first mover advantage of being a disruptive, game-changing technology years ahead of the competition. But Samsung (OTC:SSNLF) has a special arrow in its quiver -- the flexible smartphone -- and it has Apple's name on it.

Many people also know that the iPhone itself is normally prohibitively expensive. The reason it sells so well is largely due in part to the large subsidy cell phone carriers typically pay up front for the consumer, expecting to get it back from the service fees in a contract. This typically allows the customer to obtain an iPhone for anywhere from a $450 to $650 discount. But the real costs of owning an iPhone are less widely known, but are quickly being discovered by consumers the hard way.


iPhone screens have been cracking at alarming rates. It has been labeled the most accident-prone smartphone with reports that 3.9% of iPhone 4s suffered broken glass in the first four months, 13.8% reportedly broke within on year, and a whopping 25.6% failure rate within 2 years (18.1% of that being an accident rate alone). The glass breakage rate is so frustrating for consumers that a class action lawsuit was attempted against Apple over it (though it was recently dismissed).

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Replacements don't qualify for the subsidy that the original gets. As a result, getting a new iPhone sets a customer back $500 or more. OUCH. But insurance solves that problem, right? Wrong. AT&T (NYSE:T) charges $6.99/month plus $199 deductible. Verizon (NYSE:VZ) charges $10.99/month plus at least a $169 deductible. Sprint (NYSE:S) offers no insurance but recommends Applecare plus which is $99 down and a $49 deductible. Good deal? No. See the table of real cost of what one must pay to get a maybe a $500 savings:

Cost Over
Carrier Per Month 1 Year 2 Years Deductible Total Cost
AT&T 6.99 83.88 167.76 199.00 366.76
Verizon 10.99 131.88 263.76 169.00 432.76
Applecare N/A N/A 99.00 49.00 148.00
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Two words, especially for Verizon customers: why bother? You've got better odds playing insurance on a hand of casino blackjack which doubles your money at a 30.6% chance than the value of buying AT&T or Verizon insurance which you have less odds of using and your savings doesn't even add up to doubling your money. AT&T and VZ are clearly cleaning up off their insurance plans. What a deal for them and their shareholders! But far too expensive and frustrating for most iPhone users except for the few that perhaps get the Applecare plus plan. Of course, that doesn't account for the frustration and time lost from a cracked iPhone screen.


"Bend without breaking" is the claim. This could be the iPhone's Achilles' Heel. Not only have million of iPhone users experienced the frustration of broken iPhones, the cost of such, and the expense of replacement and/or insurance, but no doubt so many live in fear of such occurrence. Samsung's flexible phone may just be the next big thing that consumers flock to. If a material portion of consumers throw in the towel and head for Flex-phone from Samsung, it could have a dramatic impact on AAPL's sales and profits and potentially even force it to respond with lower price, delivering a blow to their profit margins.

Samsung Flexible Display

The number one advantage to the flexible smartphone from Samsung is that it said to be essentially shatter-proof. And solving the frustrating screen cracking if the iPhone is only the beginning (but likely the initial draw). Research suggests it will greatly extend the battery life by as much as 40 to 60%. Also a flexible screen allows folding of the phone. This give it the ability to adjust it to a smaller, more comfortable size that fits into a pocket while still being able to expand the screen when in use similarly to the advantage flip phones used to have. This removes screen size limitation without sacrificing convenience. In turn, the bigger screen will allow for better video calls, movie watching, games, and other apps all the while being thinner and lighter. Finally, it would allow for cheaper manufacturer which could potentially make Samsung even more price competitive while actually increasing, rather than reducing, profit margins.

AAPL apparently has its eyes on a flexible phone as well that based on its patent can bend into "concave and convex configurations." Not exactly the same and would severely lack the advantages of the Samsung version mentioned above. Of course, this is just a patent and doesn't mean for sure AAPL will ever actually use it. Other than that patent tidbit, there's no evidence or word from Apple on a flexible phone. In fact, back in 2010 Steve Jobs when asked about flexible phones for Apple said it was "many, many years into the future." I don't think 2-3 years quite qualifies.

You didn't think AAPL would grow and hold its market share of the smartphone market forever, did you? Being a first mover has its advantages. But in the mobile market, it's always been a matter of time before competitors "one up" each other, resulting in percentage shifts in market share. And we even are seeing it with the iPad:

Pew Research 2012 Tablet Market Share

Clearly an Achilles' Heel was found with the iPad causing Apple to lose 29% of its market share, down from 81%, in a single year. On a sequential basis, the iPad market share dropped from 69% market share in Q2 2012 to 55% market share in Q3 2012 to 52% now. This trend is further forecasted into 2013 where the android tablets are expected to overtake the iPad in market share.

In light of this, I would be cautious owning AAPL beyond the next 1-2 quarterly reports and would even consider a position instead in SSNLF.PK. Watch out, iPhone. Your Achilles' Heel is exposed, and Samsung's thinner, lighter, cheaper, shatter-proof, bigger-to-use-yet-smaller-to-carry flexible smartphone may be its arrow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.