7 reasons Samsung is hurting

Samsung's (SSNLF) second-quarter 2015 earnings guidance is out, and the news is not good.

The South Korean electronics company is poised to record its seventh quarterly year-on-year quarterly decline in profit and another fall in revenues, which are down 8.4%.

And this is for a quarter that saw the launch of the company's Galaxy S6 smartphone.

Although it might be tempting to explain this as a clear case of Apple (AAPL) besting its mobile rival, Samsung was the biggest seller of smartphones in the first quarter, holding 24 percent of the market, compared to 17.7 percent for Apple's iPhones. That's according to a report by CNET, which attributed the numbers to market researcher Strategy Analytics.

The causes of Samsung's problems are more complicated:

  • Bad forecasting -- When releasing the S6, Samsung offered two versions: one regular and another, the Edge, with a screen that curved on the edges. According to the Wall Street Journal, the company expected to sell four of the regular version for every Edge. But demand for the latter was much higher than expected, selling roughly even with the conventional model, so there wasn't enough stock to satisfy users.
  • Manufacturing problems -- Exacerbating the lack of supply was the difficulty in manufacturing the Edge, so Samsung couldn't catch up with demand because it was unable to build additional units quickly enough.
  • Loss of its differentiation -- Apple enabled Samsung's expansion largely by not offering a large screen model of the iPhone. People loved the bigger displays. Now that the iPhone 6 Plus is out, the advantage that Samsung enjoyed is over. Based on demand, the Edge offered a new advantage, but Samsung stumbled in capitalizing on it.
  • Misunderstanding the changing market -- New Android phones run on the same software from Google (GOOG). If consumers can't get the model they want, there's no reason to save only $100 to get the lower-end version of the S6 when you could spend hundreds less to get another manufacturer's big-screen phone instead, according to blogger Ben Thompson. If you're going to settle, might as well save big.
  • More low-end competition -- Samsung faces stiff and increasing competition on the low-end model front from China.
  • China sales slow -- China's smartphone sales contracted year over year, according to IDC. What had been viewed as the growth market is becoming saturated.
  • Samsung is more than smartphones -- Unlike Apple, which depends on the iPhone as the big margin source, semiconductors have been the big margin producer for Samsung, according to equity analyst site Trefis. Although mobile devices have pushed demand for memory chips, one of Samsung's strong areas, the average selling price per gigabit of memory has fallen consistently since 2010, and will likely continue to do so. In addition, mobile DRAM memory, one of the cheaper types, increasingly becomes a larger portion of the mix. Also, television sales, and Samsung is a large manufacturer of screens, have declined.