(By Mani) In addition to its functionality, iPhones, like cars, are purchased for what they say about the owner. Apple, Inc. (NASDAQ:AAPL) and iPhones are cool. Moreover, owning an iPhone suggests a level of affluence given its cost.
However, Samsung is slowly taking the bite out of Apple with its Galaxy S III giving a strong competition to iPhone 4S.
In the smartphone race, Korean technology giant Samsung seems to be getting ahead of Apple. In the second quarter of 2012, Samsung's mobile phone sales rose 29.5 percent and managed to extend its lead over both Apple and Nokia (NYSE:NOK) quarter on quarter, according to a data from Gartner.
The growth was driven by record sales of Galaxy smartphones, meaning smartphones now account for 50.4 percent of all Samsung mobile devices, or 45.6 million units. In total, Samsung shipped 90.4 million in the second quarter, taking a share of 21.6 percent of the market.
"In the race to be top smartphone manufacturer in 2012, Samsung has consistently increased its lead over Apple, and its open OS market share increased to one-and-a-half times that of Apple in the second quarter of 2012." Gartner analyst Anshul Gupta said in a statement.
Specifically, demand for the new Galaxy S III was particularly strong, exceeding Samsung's own expectations, with 10 million units reached in the two months after its release. The Galaxy S III was the best-selling Android product in the quarter and could have been higher but for product shortages.
On the other hand, consumer demand for the Apple iPhone weakened as sales fell 12.6 percent from the first quarter of 2012, but grew 47.4 percent year on year. Apple grabbed 6.9 percent market share by shipping 28.9 million units, Gartner said.
Depending on the exact launch date of the new iPhone, Apple might experience another weaker-than-usual quarter in the third quarter of 2012, while Apple will be ready to take advantage of the strong holiday sales in North America and Western Europe that have historically remained immune to economic pressure.
As the Galaxy S series from Samsung is perceived by some as having trumped the iPhone in features, Apple's upcoming iPhone 5 will need to leapfrog in terms of both style and features. Apple fans want the latest and greatest functionality as it was evident from the lower sales of iPhone 4S during Apple's third quarter in anticipation of iPhone 5, which is expected to be released during September. Still, the market is concerned that 4S demand seemed satiated fairly quickly.
For the third quarter, Apple sold 26 million iPhones, a 28 percent increase from last year. However, on a sequential basis, iPhone sales fell 26 percent from 35.1 million units sold in the second quarter.
In the past year, Apple's hardware edge has been narrowed if not eclipsed by new high-end offerings from Samsung and HTC. Recent midtier smartphones match or exceed the iPhone in processing speed, RAM, display, and camera but fall short relative to the iPhone's internal storage capacity, but offers support for expandable memory by providing a slot for memory cards.
"Indeed, the fickleness of consumers as witnessed in video games and past cell phone cycles means that Apple has to earn its premium brand reputation every product cycle," UBS analyst Steven Milunovich said in a client note.
However, the iPhone 5 should raise the bar on most fronts, including the addition of in-cell displays, which will slim down the device and/or allow more room for components such as batteries.
iPhone 5 should be equipped with the latest 4G/LTE technology and will likely come with a redesign as well, and the refreshed iPhone 5 would be available during the late summer/early fall time frame to capitalize on the holiday season demand.
Even with Apple's leapfrog innovations, mid-to-high-tier handset makers have been fast followers at lower prices. Apple's response has been to incorporate increased Mandarin functionality with the release of Mountain Lion and the upcoming iOS 6.0 update in September.
Meanwhile, the strength of Apple's iPhone offering comes from its high-performance hardware, superior user interface, and stable and convenient ecosystem. The company added Siri, a voice assistant, which was the key selling point for iPhone 4S.
"Comparing software capability is more difficult than hardware specs, but we believe the iPhone is more intuitive and easier to use than Android," Milunovich noted.
Still, Apple has to beef up the features and the cool factor of iPhone 5 if it needs to stay ahead of the competition, primarily Samsung.