Race to the bottom: how are Google and OEMs going to cope with commoditization?

July 11, 2014
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clearance sales Mike Mozart

The average selling price (ASP) of smartphones is falling and they are growing increasingly similar. It’s much quicker to point to the minor differences between the latest releases than it is to list all they have in common. The platforms have never been more alike, the result of years of borrowing the best features from each other. Commoditization in the smartphone market is happening and it presents some interesting questions for Android OEMs.

What is commoditization?

According to Merriam-Webster, to commodify is “to render (a good or service) widely available and interchangeable with one provided by another company.”

Think of the PC market, where price largely trumped brand and differentiation. There’s very little that is unique about any of the latest smartphones and if an innovation by one brand appears to have had an impact with consumers it becomes a standard within months. It’s a problem that’s especially clear at the bottom end of the market.

If manufacturers can’t compete on things like features and build quality then they compete on price.

The same inside

When you look at the spec sheets of a lot of smartphones, they really are incredibly close. Most of the components are identical, made by the same companies and just put together a little differently, or skinned with a UI overlay and a smattering of apps. Even the UI features and apps that OEMs try to use for differentiation are strikingly similar.

An extreme example of this is original device manufacturers (ODMs) selling their unbranded devices onto OEMs. Many big OEMs started out doing this, for instance, HTC made phones for Fujitsu-Siemens and Sony Ericsson. It’s still a very common practice and it contributes to the homogenization of smartphones.

A race to the bottom

This chart illustrates the falling ASP pretty clearly and it highlights the difference in Apple’s approach. We can sum it up by simply saying that Apple isn’t willing to cut profit margins in exchange for increased market share.

Infographic: The Price Gap Between iOS and Android Is Widening | Statista

You will find more statistics at Statista

Looking at IDC’s last prediction it forecasts an ASP of $247 for Android smartphones this year and predicts that will drop to $202 by 2018.

We shouldn’t ignore the fact that this trend is also being driven by smartphone penetration reaching saturation levels in developed markets. The new battleground is emerging markets with different needs and expectations and one of those is lower prices.

Google is happy

Take a look at what Google has done with the Nexus line and with Motorola (when it was briefly in charge). The Nexus 7 and the Nexus 5 had razor thin profit margins; there was even some speculation that Google might be making a small loss on them. A Wall Street Journal piece last year suggested that the Moto G has a profit margin of less than five percent, compared to 28 percent for Samsung Galaxy S4, and at least 30 percent for Apple’s iPhone 5S.

Google Nexus 5 black vs white aa 7

Driving the ASP down is a win for Google because the aim is to get Android devices with Google services on them into the hands of as many people as possible. Google is all about the market share because it’s really set up to gather data and sell advertising.

Google is also pushing for less fragmentation and hoping to create an Android experience that is uniform across devices. The introduction of Android L and Material Design addresses this directly, as do the Google Play edition phones and the rumored Android Silver program.

Samsung is sad

There’s no way to spin this as a positive for Samsung. As the other OEMs drop prices Samsung is forced to follow or risk losing the commanding market share it has built. Does it have the brand loyalty and control over the platform that Apple maintains? The Galaxy brand is powerful, but Google controls the platform. This is one of main reasons there was so much speculation about Tizen, but it doesn’t look like Samsung is going to make that leap.

Samsung Tizen OS

Samsung gained command of the TV market by undercutting the competition and it has a profit margin well below 5 percent. In the first quarter of 2014 Samsung’s mobile wing accounted for 76 percent of the company’s overall profit. It’s expected to announce a third quarter of profit decline in a row because it simply isn’t making as much money selling smartphones or smartphone components as it used to and that’s because the ASP is going down.

What about the other Android OEMs?

This isn’t good news for a traditionally premium brand like Sony either. It has to hope people will be willing to spend more on quality and leverage its own ecosystem of content and electronics to provide greater incentives to buy a Sony Android smartphone over something else. HTC appears to be proving that premium build quality has a genuine appeal and can secure a decent market share.

Most of the rest of the gang (LG, Huawei, Lenovo, ZTE, TCL Alcatel, and Xiaomi) are already engaged in an aggressive price war.

The downward spiral

There’s always going to be room for premium brands. People buy into the relationship between quality and high prices, but there’s a limit to how many premium brands can expect to go on extracting a good profit from the smartphone market and Apple is firmly entrenched.

If the Android OEMs don’t resist the drive to drop prices then they could end up like Dell and HP in the PC market, locked in a price war that ends up destroying their profitability altogether. It seems like the increasingly divergent interests of Google and the big OEMs could cause some problems down the line.

In the short term there’s enough potential profit to go round and let’s not forget that the price war is great for consumers, but it can’t last forever.

Comments

  • killerbee

    some minor correction, samsung actually made more money Q1 2014 (net profit is higher) than last year.
    it should be pointed out alos that apple’s ASP for their phones have been going down

    • AbbyZFresh

      Yeah. But only slightly. Apple is only cutting down enough to keep their profit margins as high as they can keep it. They have the strong brand power and ecosystem that attracts people to them to continue selling despite the high price compared to most Android OEMs. Samsung is clearly starting to lose some of the power as Google continues to gain control of Android back and the Chinese OEMs continue to gain leverage.

      • killerbee

        its not only the chinese OEM’s but the strong korean won as well. Had the korean won been weaker, Q1 2014 would have had a rise compared to last year as well (in dollars). It’s expected Q3 will be lower as well for samsung as their Q3 2013 operating profit was abnormally high.

        its not samsung who should be deeply worried about (they have other sources of profits and revenue as well as their strong brand) but the these emerging chinese and Indian brands who keep selling phones at low cost (notice how xiaomi “guards” their profit figures)

        • AbbyZFresh

          Samsung’s other sources of profits aren’t that much anymore. Last year over 76% of their revenue came from their electronics division alone. Imagine the percentage that also comes specifically from their phones and tablets. Probably even higher.

          And companies like Xiaomi and Micromax are keeping their costs low because they’re making up for it by building ecosystems around their brand(similar to Samsung but at a much larger extent) that center around online purchases and other products outside phones as well as hope that it sells in massive volumes to make some money.

  • Boonlumsion Piyapon

    premium can cheap, don’t know one plus or Xiaomi.

  • Mark Rich

    Where the hardware between phones is very similar and Google’s race to the bottom with Android’s homogenized interface, where is the differentiation been a Sony, HTC or Samsung going to be? Just tweaking a shape here and there with less and less control over the interface will produce bland machines similar to the wintel pc era.

  • Dimitrios Kirkos

    Yes! Back to the age of 250-350 dollar (euro) smartphones. The $600 smartphone was an anomaly.

    • MasterMuffin

      Smartphones used to cost way more and do way less

  • _X_

    Can I just be the first one to comment Samsung on the new Galaxy App store. It looks good and it is faster than the Google app store! I think Samsung is changing for the better!

  • _X_

    I think Tizen is the way to go. I believe Google will force manufacturers to implement stock Android soon and with KNOX integration it will make rooting a difficult task. At the end it will be Apple, Microsoft, Android manufactures and then Samsung because they will stand out of the crowd

  • abazigal

    To me, it’s inevitable. Android smartphones have very little way of differentiating themselves from one another, not when they run the same underlying OS, tap on the same Google services and access the same app store. Hardware works to a certain extent (but isn’t always a home run – just ask HTC). Samsung recognises the need for this, hence Touchwiz.

    I think this is the future of the smartphone market going forward. Google will become more and more closed, Apple will experience decreasing market share (but still sell more devices) while continuing to command the lion’s share of profits, while Samsung and the others will have to contend with rapidly diminishing margins.

  • symbolset

    Well if we aren’t complaining about fragmentation then it is commoditization we worry for. Look, with over a billion devices per year there is plenty of room for variety.

  • Goblin Shark

    Google will face push back from the OEMs as their hand grows heavier. Samsung and the others will either bring out their own OS or just be reduced to much of a sameness. If Samsung brings out Tizen and it is successful, the others will follow suit.

  • Shark Bait

    Google are totally going to win the race to the bottom as you called it. Android one is a strong idea of how to do this, practically making lots of nexus devices with OEMS all over.

  • stucrmnx120fshwf

    Once again, if the OEM’s don’t really offer something new, why should we buy, many of us are waiting for something significant to change. 64 bit, UHD, 128 GB of flash, 4 GB of RAM, say 192 eg. Nvidia GPUs, things like Tango and or Ara. OEM’s we don’t really want your skins, Apple and Nexus are successful precisely because, they are locked down for the general user. We will buy high end if they supply it, but minor tweaks, why lay out the dough. Stop being lazy and do some serious hardware work, you know that you can do 64 bit, Apple has already done it, using the same ARM designs, your going to use. Your already at QHD, but we don’t want interim measures, we want UHD, if QHD in 5.5″, then UHD in 8″ now. Flash is very cheap, I can get 128 GB of USB 3 stick for $72, so as OEM’s in bulk, you can get it for $12 or less. Stop wasting so much money on skin, or marketing and do the hard hardware work, get together with the googameistro. Remember advanced hardware and KISS keep it simple stupid, GIGO garbage in, garbage out, consumers don’t want to have to reprogram their phone, or tablet. Beware, when desktops went 64 bit, they also went crapware, projects butter and svelte, were successful, because they are more reliable and fast, put less strain on the hardware, so it can do its magic.

    • Michael Samsara

      Well put.

  • michaelmicro

    This is (sadly) what you get from the Android business model. There were a lot of us who called this a few years ago and here it is.