J
Jeff Causey
Guest
After news came out earlier this week that Samsung, despite its size and commanding position in the smartphone market, was still expecting a decline in operating profit for the second quarter in a row, many people started wondering what the future may hold for smartphone manufacturers. Analysts indicate the market is already suffering from softening margins and the pressure will be on market leaders, like Samsung and Apple, to make their high-end phones more affordable. Besides the squeeze on margins at the high-end, analysts also see more of the market shifting to other segments, especially low- and mid-range smartphones targeted at the “mass market.”
According to analysts, Samsung is already showing signs of responding to the changes. For example, the price of the Samsung Galaxy S 5 in South Korea has been reduced by about one tenth already. The company is also adding in a package of apps and web content valued at approximately 600,000 won ($570 USD). According to Lee Min-hee, an analyst with IM Investment, Samsung has also moved to reduce the cost of producing the Galaxy S 5 by 10 to 15 percent compared to the Galaxy S 4. Even with these moves, Samsung expects their margin on the devices to continue to weaken. Such moves also come with another downside – they make it harder to maintain a premium brand image.
Another premium brand phone manufacturer, Apple, could be in an even more difficult spot. Analysts like Walter Piecyk with BTIG note that Apple is “foregoing incremental revenue opportunities by not having a product that addresses that market” in reference to the mass market of buyers looking for something other than a premium phone. Some documents that came out in court recently suggest Apple is aware that one of the items consumers want is cheaper phones. The company does not appear to be ready to go down that path though leading investors to hope Apple can be successful with new products, like wearable devices. To be sure, Apple enjoys a large margin on their devices in the 40 percent range, but that is down from a few years ago and the trend appears to be for a continued slide. This could even accelerate if they produce an iPhone 6 with a bigger screen, another item consumers are clamoring for.
While the leading manufacturers of smartphones struggle to maintain strong margins in light of consumer demand for cheaper, larger devices, smaller companies, especially those located in China, seem poised to have an impact on the mass market. During 2013, the share of smartphone shipments from companies outside the top five increased to 39.3 percent compared with 27.4% in 2011. Lee points out that “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.”
Do you think Samsung and Apple will be able to maintain their dominant positions for the next five years?
source: Reuters
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