Apple Is Losing to Samsung, Not to Google

NEW YORK (TheStreet) -- The device market has devolved into a two-horse race, with Samsung for the masses and Apple (AAPL) for the classes.

The company being squeezed out is Google  (GOOG). Although Android phones represent 80% of the market, Google is losing money on its hardware, and its largest partners plan to continue taking away its software profits.

Last week's news that Apple and Samsung, between them, represent all mobile industry profits put a period to that sentence.

The most recent IDC Worldwide Quarterly Phone Tracker shows how it's done. Four in five phones sold now are Android phones, but Apple sales were still up substantially during the third quarter from the same period a year ago, according to Strategy Analytics.

Still, Apple got 56% of the industry's profits during the quarter, according to Canaccord Genuity. Samsung had 53%. The total is more than 100% because everyone else lost money.

A study by Union Square principal Fred Wilson also shows marked differences between Android and Apple buyers. He sees an Android "barbell," with very young buyers without cash and older buyers without appetite for many apps surrounding Apple, which controls the high-end and high-spend heart of the U.S. market.

The situation is different in the tablet market, where Samsung "phablets," small tablets that double as phones, hold a large share. UBS analysts say Apple's share of the tablet market has plunged, from 70% to less than 30%, as Asians gobble up products that sell for less than $200.

Real tablets (as opposed to phablets) are mainly being used for entertainment, according to UBS. This benefits Amazon.com (AMZN), which integrates its Android-based Kindle with its own media offerings. When tablets aren't mobile, they're Amazon. When they go on the road as phablets, they're Samsung.

Amazon has customized Android so that Google is cut out of the revenue stream. Samsung hopes to do the same thing with Tizen, a new operating system Samsung is developing with its business partners.

These partners include Intel  (INTC). The Tizen software is based on Intel's old Meego project, which, like Android, is a version of Linux. Intel hopes to use Tizen to finally gain a foothold in the mobile space with Samsung having folded its first effort at a mobile operating system, Bada, into Tizen.

Samsung also hopes to get into the "class" end of the market with new "wraparound displays" that put function keys on the side of the phone. Apple, meanwhile, may abandon Corning  (GLW), the maker of its past displays, for a new technology based on artificial sapphire. Apple is also targeting Samsung's share in India and China through new agreements with carriers aimed at bringing down the upfront cost of its phones.

The result is that, despite Apple's successful monetization of its iPhone and iPad, UBS has a neutral rating on the stock, even though Apple has a below-average price-to-earnings ratio of 13.2 and a $3.05-per-share dividend that now yields 2.34%. 

Samsung is doing precisely what Microsoft  (MSFT), which now has 4% of the mobile market, did to Apple more than two decades ago. Apple was years ahead of the pack with its Macintosh PC, but Microsoft was able to make the business market wait for Windows through alliances with companies such as IBM (IBM), in part thanks to high Apple prices, and it eventually dominated the market.

But it's not Google that's Microsoft in this case. And it's certainly not Microsoft that's Microsoft in this case. It's Samsung. That's the story investors need to watch in 2014.

At the time of publication, Blankenhorn owned shares of Apple, Google and IBM.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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