As the smartphone action shifts to the mass market, leaders Samsung
Electronics Co Ltd and Apple Inc are under pressure to make their
high-end phones more affordable to revive sales. And that may spell
trouble for already-softening margins.
Samsung, which said on
Tuesday it would likely post a second straight quarterly profit decline,
has knocked around a tenth off the price of its Galaxy S5 in South
Korea, in the first such move for a marquee smartphone launch - the S5
rolls out globally on Friday. And it's throwing in a free gift pack of
media subscriptions and web apps worth 600,000 won.
market - where a smartphone can be had for as little as $25 - is the new
mobile device battleground, as high-end growth eases off with sales
slowing in mature markets. Japan, for example, may see smartphone
shipments shrink this year, according to researcher IDC.
flagship S5 price cut suggests the South Korean firm wants to encourage
users to trade up to a fancier phone - at a potential cost to its
margins. Samsung's mobile business operating margin dipped to 16 percent
in October-December from 18 percent over the whole of 2013.
reflects how much Samsung is agonizing to secure margins. They're now
offering premium models at lower prices as the demand outlook for
high-end phones remains uncertain," said Lee Seung-woo, an analyst at
Premium smartphones tend to be priced at above
$300 and pack in more features, such as more powerful processing power,
high resolution display, better cameras and fingerprint reading. With
the S5, which has few hardware improvements from its S4 predecessor,
industry watchers reckon Samsung is aiming more at a broad mass market
than tech savvy users.
To be sure, Samsung has a far broader
product line-up than rival Apple, and it has some leeway to trim prices
given that manufacturing costs have fallen. Lee Min-hee, an analyst at
IM Investment, reckons the total cost of production materials for the S5
- from the battery and screen to the processor and sensors - will be
10-15 percent lower than for the S4.
While this allows vendors to make quality phones for less, it makes it tougher for them to maintain a premium brand image.
needs to be very clear about the market segment it's pursuing," said
Clement Teo, analyst at Forrester Research in Singapore. "Take Apple -
it didn't drop prices on its iPhones, even with the new models. This
helps it maintain a margin premium and attracts a certain loyal user
But Cupertino, California-based Apple is also taking note
of the growing potential of the mass market. Internal documents revealed
during an ongoing U.S. patent trial against Samsung indicates some at
Apple felt the company priced itself too high.
Less pricing change at Apple
to an April 2013 presentation filed to a U.S. court, executives had
debated plans for Apple's 2014 fiscal year and concluded that consumers
wanted what it wasn't offering: cheaper phones - for less than $300 -
and bigger screens.
It's unclear how representative that
presentation is of Apple's mindset. Nor are there signs that Apple,
which thrives on its premium positioning and plays down suggestions that
it go mass-market, intends to deviate from its path.
Apple did not respond to requests for comment.
'economy' model may wedge Apple more firmly in emerging markets - a
segment still seeing strong growth. Apple now relies on discounted older
generation phones to reach cost-conscious buyers, but buyers in markets
like Brazil and China increasingly want the latest gadget.
shipments grew just 8 percent in Apple's 2013 fiscal third quarter, a
far cry from five years ago when shipments more than doubled.
are foregoing incremental revenue opportunities by not having a product
that addresses that market," said BTIG analyst Walter Piecyk, adding
that the main hope of investors now is that Apple produce a new product -
a wearable device, say - to galvanize revenue growth.
5C, a colorful plastic model priced just $100 cheaper than its premium
cousin, was aimed at emerging markets and marked a departure from
Apple's focus on premium phones last year. But it's not been a
spectacular success. Some analysts theorize that an unwillingness to
sacrifice profitability meant the device wasn't priced cheaply enough.
A thinner slice
iPhone margins have crept south as the company packs more features into
its gadgets, trying to stand out in an increasingly crowded field. As
its market share dwindles, the company enjoys less leverage to squeeze
suppliers. And margins may fall further if Apple introduces bigger
screens as expected.
Bernstein Research analyst Toni Sacconaghi
estimates that making the screen just 30 percent larger could wipe 4-5
percentage points off gross margins. iPhone margins are now in the
mid-40 percent range, down from 50-60 percent a few years ago, analysts
"With the iPhone 6, Apple is likely to stick to premium
pricing as it's widely expected to come with a bigger screen and some
innovative design tweaks," said Doh Hyun-woo, an analyst at Mirae Asset
Securities. "They are unlikely to make as much change in pricing policy
as Samsung does."
The average selling price of a smartphone
globally is seen dropping by more than a fifth by 2018, to $260,
according to IDC, as more buyers, especially in emerging markets, opt
for price over brand, and as manufacturing costs continue to drop.
iPhone remains the most expensive smartphone, with an estimated average
selling price this year of $649, more than double the average price of
$247 for Android phones, Samsung's mainstay products, according to IDC.
Average selling prices of iPhones will drop only 6 percent to $610 by
2018, while Android prices will decline 18 percent to $202, according to
those IDC forecasts.
"Apple has a clear strategy - to be the best
in the market segment it competes in, and it has performed well," said
Forrester's Teo. "Regardless of 5C sales, the bigger picture is that
Apple is relevant to users in their moment of need - through an iPhone,
iPad, iPod or its App store."
China chips away
while, competition from cheaper smartphone brands is getting fiercer.
The share of smartphone shipments by vendors outside the top five -
Samsung, Apple, Huawei, LG Electronics Inc and Lenovo Group - rose to
39.3 percent last year from 27.4 percent in 2011.
From Nokia to
BlackBerry Ltd and a host of Chinese vendors, manufacturers are bringing
out cheaper, stripped-down smartphones aimed at hundreds of millions of
potential users in emerging markets such as China, India and Indonesia.
manufacturers - from global names such as Huawei and Lenovo to the less
well known Gionee, Oppo and CorePad - are picking up market share as
they acquire technical and design expertise to add to their low
"The winners in the current market conditions
will be those who show the best cost-efficiency, and in that sense
Chinese players will be in a better position," said IBK's Lee.
© Thomson Reuters 2014