Declining Smartphone Prices Hit Samsung Again

Declining Smartphone Prices Hit Samsung Again

Smartphone profits and margins continue edging downward

With the average price of smartphones dropping year-over-year, Samsung has been hit by a second straight quarter of declining margins and profits. The world's largest maker of smartphones said this week that sales in the most recent quarter were flat, year-over-year, but that operating income dropped 4 percent. It's a trend that will impact all of the major players in this market as mature markets become saturated and these firms are forced to push lower-end devices in new growth markets.

In a brief statement, Samsung said it expected to report an operating income of $8 billion in the most recent quarter, a bit higher than analyst expectations but down 4 percent from the same quarter a year ago. Revenues will be about $41 billion.

Of course, Samsung is just now launching its next "hero" device, the Samsung Galaxy S5—see my Samsung Galaxy S5 Preview for more information—so the results for the current quarter could show a positive bump in a few months time. But last year's big launch for the Galaxy S4 netted a shorter than usual sales burst, and the expectation going forward is that this trend will continue. It's now the lower-end devices that are selling well, not the high-end, expensive hero phones.

As a result, the average selling price (ASP) of smartphones is falling year-over-year, as is the profits and margins for the firms that make these devices. The ASP of a Samsung smartphone was $235 in the second quarter of 2013, but that had fallen to $209 by the end of the year. And it will dive further this year as Samsung, and other firms, turn to price-conscious emerging markets to pump up the sales volume.

Samsung makes about 31 percent of the smartphones sold worldwide, double its nearest competitor. But this lead exaggerates the mix of low-cost and high-end phones it must sell: In order to maintain or grow this lead, it has to sell more and more of the low-cost—and low margin/low-profit—devices that new markets demand. Thus, as the market gets ever bigger, it's also heading down market. And it's getting harder and harder to differentiate higher-end devices with meaningful features.

Samsung's biggest competitor, Apple, has so far remained above the fray. That firm was expected to launch a low-cost smartphone option last fall, but the resulting iPhone 5C was simply a second high-cost option alongside the more popular iPhone 5S. This has enabled Apple to maintain its heady margins while it loses market share group worldwide, but especially in these emerging markets. Apple has even fallen behind Microsoft's slow-selling Windows Phone in many markets as a result. Microsoft and its partners, unlike Apple, offer many options at the low-end, but that's more out of necessity than choice.

For all the changes in the market, at least Samsung is still dominant. By comparison, some of its Android-based smartphone rivals are stumbling badly. Google sold off its Motorola Mobility unit after the well-received Moto X and Moto G went nowhere fast, and once-mighty HTC just reported its third quarterly operating loss in a row. That firm's revenues are down 22 percent year over year.

And Nokia, once the world's largest maker of smartphones, accounted for only about 2 percent of all smartphones sold last year. That firm will become part of Microsoft as a result, in a deal that could be consummated within days.

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