The Great Consumer War: A Tale of Two Smartphones

Imrann Teo (0303740) - Section 9 - Second Article

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The Great Consumer War: A Tale of Two Smartphones

The Apple iPhone and the Samsung Galaxy smartphones held side-by-side.

            Recently, Apple won Samsung in a legal case which cost Samsung $1 billion, just one of the many ongoing conflicts between the two mega corporations, but one which brought into the limelight this whole issue based on consumerism. An article on TechCrunch posted on October 7th, 2012 by Ingrid Lunden discussed this corporate war and its impacts on the consumer by looking at some surveys done by other organisations. I want to further dissect this complicated situation and discover what effects it has not only on the consumer, but on the companies themselves and how it affects some economies.

Just a decade ago, smartphones were considered as novelty devices, but are now considered necessities for many people. With the advent of social networks and mobile internet, technologies such as social networks provide further incentive to the consumer, as more people gain access to instant, unlimited information, an indispensable advantage in today’s competitive world. At the forefront of this burgeoning market are Apple Inc. and Samsung Corp., two of the largest and most popular smartphone producers in the world, with Apple holding 17% of the global smartphone market share, and Samsung holding 33%. The two iconic brands of smartphones from those companies are Apple’s iPhone and Samsung’s Galaxy. An on-going issue is the war between Apple and Samsung, as they fight for control over the global smartphone market. Both Apple’s and Samsung’s line of branded smartphones have powerful influences on economies and consumers, and this in turn is affected by many economic principles, namely, the laws of demand and supply, the price elasticity, and oligopoly market characteristics, as Apple and Samsung can be considered oligopolists in the smartphone market.

Source: International Data Corporation.

It would be worthwhile to discuss the price elasticity of demand of these smartphones before continuing. Either one of these smartphones, the iPhone or the Galaxy, are very close to each other in terms of substitutes. Therefore, if the iPhone were to increase in price by a large amount, the demand for Galaxy phones would definitely increase by a lot. This is because the two products are differentiated only by a few factors, such as design and brand. Their features and functionalities are relatively similar. In terms of proportion of income spent on these goods, these smartphones are fairly expensive for an electronic device, especially for young adults (the main demographic for these devices), thus one can expect that this contributes to the high elasticity of the prices of these devices. Furthermore, these phones can be considered luxuries, because a person would only actually need simple phones without the added features to make calls and receive messages. It is clear that the price elasticity of demand for smartphones plays a vital role in this battle of corporations, and it influences many of the decisions of these companies.

            Apple Inc. is one of the highest valued companies in the world right now, and being based in America, it has great power over its economy. However, the Apple iPhones are only designed in America, the company actually outsources almost all of the production to Foxconn, a Chinese manufacturer. One of Foxconn’s largest factories, in Shenzhen, actually employs upwards of 300,000 employees. Providing so many jobs has definitely reduced the unemployment rate in that region, and has also raised the living standards of the employees. There is however, no shortage of supply of workers for the factories, because the Chinese people are rapidly transforming themselves from farmers to more industrial jobs. This high supply of workers means that the wages of these workers are comparatively lower than that of other countries, conforming to one of the basic principles of supply and demand. The executives at Apple stand by their decision to outsource, saying that "the speed and flexibility is breath-taking, there's no American plant that can match that.” The cost of producing smartphone parts in China has to be lower than the cost of transporting those parts to America, otherwise Apple wouldn’t have outsourced at all. By cutting costs on production, Apple is able to provide their products at a cheaper price, their iPhones, which in turn increases the demand for them.

The Foxconn factory in Shenzhen, China.

            Apple and Samsung are both players in a large oligopoly. Other oligopolists in the smartphone market would include RIM and Nokia. Having dominated the market, these few sellers have to know what each and every one of their competitors are up to, because every decision made by them will affect every other seller. They are limited by the information they have about their competitors, and many of them go to great lengths to acquire that information. These few companies are very large and completely interdependent, one of the key features of an oligopoly. An analogy for this situation is chess, where each oligopolist has to predict and calculate the many moves and countermoves his competitors can make. For example, if one of the corporations plans a price reduction, the other oligopolists may well follow suit, triggering a dangerous price war. Thus, it can be seen that the oligopoly that Apple and Samsung find themselves in is a highly dynamic market has pushed them into somewhat of a corporate war, where they both have to play their cards smart and fast in order to become the victor.

Source: Euromonitor International, (2012).

It may be helpful to give a brief overview of the smartphone market and how the income effect has a part in it. The global market for smartphones began maturing in the late 2000’s, but in 2012 have begun experiencing slight stagnation of demand due to greater amounts of saturation of smartphone brands. Now, the demand has shifted to late adopters of the device, most of who are from lower income groups. Examples of these lower income groups come from countries like China and India, with huge populations; definitely a market these global smartphone manufacturers need to get into. This is one of the reasons why Samsung structures its brand of Galaxy phones around various income demographics in order to capture a lot of the demand of the global market. Apple has yet to cater to lower income groups, which is one of the weaknesses of their line of smartphones. However, such countries with large low-income populations are experiencing rapid economic growth and increasing standards of living and income. As China, India and Brazil’s massive populations are better able to afford goods, they will be able to purchase better smartphones, resulting in a gigantic market of consumer to reach. These countries are a figurative gold mine for smartphone oligopolists like Apple and Samsung.

Therefore, it has been shown that the Apple and Samsung definitely have considerable influence on economies, and are governed by many microeconomic principles. Their smartphones are at the forefront of this rapidly expanding market. It remains to be seen who will emerge victorious in this war of consumer electronic devices, seeing as to how these devices are so similar in function to one another. As tensions escalate between these two corporations, we can only imagine what will happen next.