Who's Stealing Sales of the Samsung Galaxy S5?

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Samsung's Galaxy S5 isn't doing as well as the S4. Source: Samsung.com.

If you live in the U.S., you might not notice that Samsung's sales of its Galaxy S5 flagship phone are down. That's because it's the only market where the phone is selling more than its predecessor. Overall, in its first three months of sales, Samsung sold 25% fewer S5 units compared with the Galaxy S4. Most unfortunately, the company ordered 20% more units than it did last year, which resulted in a surplus of units it had to spend heavily on marketing to unload.

In the company's second-largest market, China, the Galaxy S5 sold 50% fewer units than the S4 in its first six months of sales. Meanwhile, the overall market in the country still grew about 20% in 2014. One of the reasons the S5 is selling poorly in the country is that the country's biggest carriers cut back on their phone subsidies this year.

But that hasn't stopped Apple . The company sold 32% more phones in China last quarter compared with the year before despite a late launch for the iPhone 6. Meanwhile, Xiaomi, which sells high-end smartphones near cost, continues to gain market share along with low-priced options from other domestic manufacturers.

Xiaomi takes the lead in China
Samsung launched the Galaxy S5 in the second quarter of the year, but it actually saw its market share decline in China during that period. In the second quarter of 2013, Samsung captured over 18% of the market, but that percentage fell to 12% this year.

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Meanwhile, Xiaomi leapfrogged Samsung to 14% market share this year, up from 10.7% last year and just 5% the year before. Xiaomi's sudden rise and expansion of its product line to accommodate budget smartphone purchasers puts it in direct competition with Samsung on both the high end and the low end.

The Chinese company's business model of selling smartphones at cost and later monetizing them with content provides a pricing edge that Samsung can only compete with through marketing. As a result, Samsung is experiencing not only lower sales, but higher marketing expenses as well.

The pattern repeated in the third quarter, when Samsung's market share fell to 14% from 21% a year ago, and Xiaomi's share increased to 16%.

Apple is taking share on the high end
Even though Apple is seeing its market share in China decline as well, its overall sales continue to increase. Last quarter, Apple's share of the smartphone market fell from 6% the year before to 5%, according to Canalys, but sales increased 32%.Those numbers seem to disagree with one another, considering the overall market is growing slower than 32%, but both indicate that Apple is doing a better job attracting high-end customers than Samsung in China.

In the U.S. and Europe, where the market for high-end phones is much larger, the anticipation of a large-screen iPhone may have slowed the adoption of the Galaxy S5 when it launched. Indeed, the launch of the iPhone 6 and 6 Plus proved extremely popular in the U.S., Europe, and Australia, boosting Apple's market share in every region, according to Kantar Worldpanel.

Feeling the pressure
Samsung is getting squeezed on both the high end and the low end (and the middle by Xiaomi in China). While it's still growing sales in the U.S., carriers are slowly moving away from the subsidy model. It's not clear the company can sustain the momentum it has without a subsidy from the carriers or continually increasing its marketing spend and incentives paid out to salespeople. Last year, the company paid out $7.8 billion just for sales promotion.

Meanwhile Apple has shown strength in markets without subsidies, noting that 80% of its smartphone sales in China were unsubsidized last quarter. Most of its sales throughout Europe are unsubsidized as well. Moreover, Apple doesn't spend nearly as much on marketing as Samsung, providing room to lever up sales if the company feels it's necessary -- although the iPhone 6 and 6 Plus seem to be doing a pretty good job with Apple's typical marketing budget.

Going forward, I expect Apple to continue taking share from Samsung at the high end while smaller OEMs squeeze Samsung on the low end.

The article Who's Stealing Sales of the Samsung Galaxy S5? originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.