Declining Smartphone Prices May Hit Samsung, Apple

by CXOtoday News Desk    Apr 09, 2014

smartphones

With smartphone prices getting cheaper, leading smartphone makers such as Samsung, HTC and Apple are under tremendous pressure. They are striving to make some of their high-end models more affordable to revive sales, which in turn are affecting their already-dwindling profit margins, say reports.

The declined cost of smartphone sales is owing to the growth slowing in North America, Europe, South Korea and Japan while consumers in developing nations tend to buy cheaper handsets.

Samsung in trouble

Samsung said it may post a second quarterly profit decline, after reducing the price of its Galaxy S5 in South Korea for the first time, right after its launch last week. It is also offering freebies and discount coupons elsewhere to lure customers.

Samsung’s mobile business operating margin reportedly dipped to 16 % in October-December from 18 % over the whole of 2013, according to reports. Declining prices of smartphones also put pressure on profit margins for components that go into mobile devices, such as memory chips and display panels, two other key products made by Samsung.

Samsung is attempting to cut costs in response to its business challenges. Earlier this year, a mobile business executive said the company will reduce the proportion of ads and promotional fees to revenues, as against $11 billion on advertising and promotions for handsets, televisions and other products last year, a Reuters report said.

Apple’s woes

Apple on the other hand is also taking note of the growing potential of smartphone in the mass market. Not only critics, but some at Apple too felt the company priced itself too high.

 An ‘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, according to a Firstpost article.

iPhone shipments grew just 8% in Apple’s 2013 fiscal third quarter, a far cry from five years ago when shipments more than doubled. ”They are foregoing incremental revenue opportunities by not having a product that addresses that market,” said BTIG analyst Walter Piecyk to Reuters, adding that the main hope of investors now is that Apple produce a new product – a wearable device, say – to galvanize revenue growth.

 The iPhone 5c, priced just $100 cheaper than its existing phones, was aimed at emerging markets and marked a departure from Apple’s focus on premium phones last year. But it’s not been much of a success. Samsung had reportedly made more than 30% of all smartphones sold in the world last year, nearly twice the share of its rival Apple.

On the brink

HTC, meanwhile, recorded a first-quarter operating loss, its third in a row, where revenues dip 22% year-on-year of US$1.1 billion. The Taiwanese smartphone maker’s revenues were boosted in March by sales of its new HTC One M8 to carriers, which will begin selling it later this week in the US and other countries, says Reuters.

HTC expects revenues to pick up in the next quarter through sales of the M8 and its mid-range Desire 816, which is aimed at the Chinese market.

HTC had around 2% of the global market, but lost out to Samsung and Apple last year.

The Chinese pie

Chinese handset makers are also vying for customers in emerging markets. Samsung faces competition from a slew of handset makers in regions such as Southeast Asia where Lenovo and Xiaomi are expanding, say experts.

“In 2014, I expect that even more Chinese vendors will come in and they will put in greater investment in such emerging markets and they will pose a bigger threat” to Samsung, said Ryan Lai, an analyst at research firm IDC.

The mass 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.