Hey Apple, Samsung's Phones Are Blowing Up

| About: Samsung Electronics (SSNLF)

I often get called an Apple (NASDAQ:AAPL) basher, but nothing could be further from the truth. I have a deep respect for Apple's focus on customer-service and its dedication to quality, thought out products. My main concern about Apple is that while the smartphone and tablet markets continue to grow, the high end - where Apple plays exclusively - is slowing down and could see heightened competition from many, including its chief rival Samsung (OTC:SSNLF).

That being said, while Samsung is surely technically competent and while it has enough of a marketing budget to keep gaining share in the handset market, the company now faces two major threats to its high end smartphone business:

  1. If Apple comes out with a bigger iPhone as well as its current smaller one (think iPhone Air and iPhone Mini), then Apple is poised to take share against the Galaxy Note line of products while at the same time defending its turf among customers who prefer the more traditional iPhone sizes
  2. Samsung shot itself in the foot with what is likely the biggest PR problem that I have ever seen from a handset vendor.

The first point is straightforward: I think a non-trivial number of people buy Galaxy Note products because they want the larger screen (and perhaps the pen). However, as we've seen with the iPad Mini, once Apple enters a new form factor of market in which it is already highly successful, it tends to gain share rather rapidly. Next year, it is my belief that Apple will up the screen size on its iPhone 6 and this will help it gain back more high margin, high ASP business.

But the second one is probably more interesting - let me explain.

Samsung's Phones Blow Up, But They Want To Keep It Quiet

There is a YouTube video from a user named "ghostlyrich". In the first video (found here), ghostlyrich describes how his friend's Samsung Galaxy S4 caught on fire and is apparently making this video as evidence for Samsung (since they apparently wouldn't replace his phone without proof). Samsung then, after seeing this "proof", agreed to offer a replacement phone, but only if he agreed to take down his video and keep quiet about what had actually happened (video here)

To me, it seems like Samsung handled this in completely the wrong way. The right thing to do would have been to offer an apology and a replacement phone with no hassle, no fuss. If they had done this, ghostlyrich would have been singing the praises of how good Samsung's customer service is on a video that would have likely been seen by a good fraction of the ~1 million people that viewed his original video.

This is a serious PR blunder and the fact that both videos have gone viral (the first with just over 900,000 views and the follow-on with Samsung's response had over 1 million views) can't help Samsung's reputation in the slightest. Indeed, would it have killed Samsung to ship this guy a phone that cost them $199 to build? I am confident that Samsung has lost more than a handful of customers permanently after this, so even if the numbers aren't material, this is an example of an absolutely poor business move and a lack of understanding of how to be a "customer centric" company.

Samsung Just Doesn't Get It

Samsung tries to copy/out-do Apple at everything Apple does, but it is clear to me that Samsung's corporate culture is vastly different from Apple's. Apple's brand loyalty comes from its reputation not only for good products but for good customer service. Samsung can set up all of the stores that it wants within Best Buy, and it can shove as much RAM and as many cores into its processors as it wants, but at the end of the day, there is probably very little "loyalty" to Samsung here.

And it'll get worse over time. As Lenovo (another very customer centric company), Motorola (it's run by Google and they love customers), and Amazon (these guys don't even earn a dime off of their customers) start to make some real pushes in the handset market here in the US with better and better designs, it's likely that Samsung - not Apple - is most vulnerable to share loss. It won't happen today or tomorrow, and I'm sure the Galaxy S5 will be a success like the Note 3 and S4 before it, but unless Samsung starts putting the customer first (at the expense of a $199 replacement phone, anyway), it will fall out of favor as quickly as it came into it once somebody is able to do what it does, but better.

Apple, on the other hand, does get it, and if management/marketing really wants to "strike back" against Samsung, it could probably open this PR blunder on Samsung's part wide-open. Maybe they'll send ghostlyrich a new iPhone 5s to replace the blown up Galaxy S4?

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.