Samsung Ahead of Apple in Smartphones, but at What Cost?

Samsung boasted that it sold more smartphones than Apple (NASDAQ: AAPL) in the third quarter, but it may not have made much money in the process. Volume is nearly useless without margins.

Samsung shipped 27.8 million smartphones in Q3, taking 23.8% of the market, Milton Keynes of UK-based Strategy Analytics said. That is confirmed by his research, according to Bloomberg. Apple sold 17.1 million iPhones in the same period.

The iPhone is sold to most carriers for $200 a unit more than any competing smartphones, if figures from Sprint-Nextel (NYSE: S) are correct. Samsung’s smartphone division said its operating margins were only 16.9%. Apple figures indicate iPhone margins are well over 50%, depending on how marketing costs are counted.

The smartphone market share race has gotten more intense by the quarter. Leaders that once included Research In Motion (NASDAQ: RIMM) and Nokia (NYSE: NOK) have lost all momentum. Nokia hopes to regain part of its lost market through its partnership with Microsoft (NASDAQ: MSFT), but the Windows mobile OS has only a fraction of the global smartphone business. It is clear that the two partners will need to spend billions of dollars to do well — if they can do well at all. Nokia may not make money in the smartphone business for years. RIM’s BlackBerry sales are so poor, it probably will never rebound.

Apple continues to have the advantage of nearly unsatiated demand for the iPhone, which grows with the introduction of each new version of the product. Analysts point out that iPhone sales have barely begun in the world’s largest handset market — China. Samsung’s lead may not last for long.

Samsung, and all of Apple’s other competitors, have to counter one concern about their smartphone businesses. How much will they have to spend to catch or stay ahead of iPhone sales?

Douglas A. McIntyre