Analysis: Samsung, Apple pressure to cut high-end phone prices

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Reuters

An Apple iPhone 5C is displayed soon after its launch last year. The lower-cost model from Apple is a symptom of the pressure on the smartphone giants to revive sales by cutting prices. Photo: Reuters

Miyoung Kim Seoul

As the smartphone action shifts to the mass market, leaders Samsung Electronics and Apple 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 that it was likely to post a second consecutive quarterly profit decline, has sliced 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 is throwing in a free gift pack of media subscriptions and web apps worth 600 000 won (about R6 000).

The mass market – where a smartphone can be had for as little as $25 (R262) – 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.

Samsung’s flagship S5 price cut suggests the South Korean firm wants to encourage users to trade up to a fancier phone – even if it has to reduce its margins on those. Samsung’s mobile business operating margin dipped to 16 percent in the fourth quarter from 18 percent over the whole of last year.

“It reflects how much Samsung is agonising to secure margins. They’re now offering premium models at lower prices as the demand outlook for high-end phones remains uncertain,” Lee Seung-woo at IBK Securities said.

Premium smartphones tend to be priced above $300 and pack in more features, such as more powerful processing power and high resolution display. With the S5, which has few hardware improvements from its S4 predecessor, industry watchers reckon Samsung is aiming more at a broad mass market.

Samsung has a far broader product line-up than Apple, and it has 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 percent to 15 percent lower than for the S4.

While this allows vendors to make quality phones for less, it makes it tougher to maintain a premium brand image.

“Samsung needs to be very clear about the market segment it’s pursuing,” Clement Teo at Forrester Research in Singapore said. “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 base.”

But Apple is also taking note of the growing potential of the mass market. Internal documents revealed during a US patent trial against Samsung indicate some at Apple felt the company priced itself too high.

According to an April 2013 presentation filed to a US court, executives had debated plans for Apple’s 2014 fiscal year and concluded that consumers wanted what it was not offering: cheaper phones and bigger screens.

The plastic iPhone 5C, 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 has not been a spectacular success. – Reuters


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