Price vs brand in the mature smartphone market
The smartphone market is reaching saturation levels in many countries around the world. Places like South Korea, United Arab Emirates, the United Kingdom, and the United States have very high smartphone penetration which means sales are inevitably slowing down. How do OEMs secure a good market share in a mature market?
What’s the difference?
Are there a lot of technological differentiators for smartphones now? Big OEMs copy each other, good ideas are assimilated, and the end product tends towards homogeneity. There are definitely differences in hardware specs, and new features like fingerprint sensors can grab short term attention, but the general experience with Android flagships is growing more similar, and the lower you go down the price scale the more similar it gets.
The mature Android platform has also been reducing the need for software tweaks. You can’t really point to any manufacturer UI and say there’s a compelling reason to buy this smartphone over that one. As hardware and software melt away as drivers of sales, what are you left with?
Realistically there are two ways to go. You compete on price or you rely on brand power.
Still growing, but prices are falling
According to IDC there will be a record breaking 1.2 billion smartphones shipped in 2014, which represents a 23.1% increase over 2013. But the average selling price has fallen 6.3% from $335 to $314 and it is set to fall further. The vast majority of new sales are coming from China and emerging markets like India, Indonesia, and Russia where the ASP is much lower than the world average.
Android OEMs are going to have some work to do if they want to preserve their profit margins
Since Android has a bigger share at the budget end it also has a lower ASP. It’s expected to be $254 for 2014 and IDC says it will drop to $215 by 2018.
We talked about the race to the bottom with commoditization before. It’s going to suit Google just fine, as all it wants to do is get Android devices into as many hands as possible, but the Android OEMs are going to have some work to do if they want to preserve their profit margins.
Skewing the figures
It’s too easy to paint a bleak picture for market leaders like Samsung and Apple when you only look at market share. As growth in markets with higher ASPs slows, their overall market share declines. To put it simply, they are taking away a smaller piece of the pie, but the pie itself is still growing bigger. A smaller piece of a bigger pie can still be worth more money.
If a relative newcomer like Xiaomi can take top spot in China, largely by undercutting the competition, then there has to come a point where it’s not worth competing for Samsung. What’s more important: profits or market share? Surely most, if not all, of the big OEMs are going to say profit.
Samsung spends a lot of money on marketing and ads ($14 billion last year) while Xiaomi relies on a different strategy. Looking at it in simple terms again, Xiaomi is spending less, so it can afford to sell hardware for less.
The big question is whether these rising OEMs offering low, low prices can disrupt mature markets and force a price war. It won’t be easy because the incumbents will fight them with patents and brand power. They also have to overcome the low quality perception and establish sales channels that bypass the traditional carrier route.
Building a premium brand
Apple is a special case in the smartphone market because it exerts complete control over the software and the hardware and, crucially, how it is marketed. The vast majority of Apple critics feel that the iPhone is overpriced. If you look at the individual specs and compare the overall experience to an Android flagship it’s clear that Apple is charging a premium.
Fans are going to argue that it’s justified, but they’ll struggle to provide tangible reasons. That’s because the Apple brand is powerful. Arguing that Apple doesn’t spend as much as Samsung on marketing and ads discounts the fact that Apple concentrates on specific markets and has a huge retail presence that other smartphone OEMs don’t have. A lot of money and energy is devoted to making the brand feel special.
Samsung is trying to build a premium brand with Galaxy and there’s plenty of evidence that it’s succeeding, but lack of software control is a definite problem. The latest release is the Galaxy Alpha and it immediately drew criticism for resembling the iPhone design, but the most alarming sign that it’s copying Apple is the fact that the price tag is way too high for this hardware. It’s the clearest signal yet that Samsung intends to wield its brand power to maintain profits.
The Alpha is the clearest signal yet that Samsung intends to wield its brand power to maintain profits
The rest of the Android OEMs are split. LG has a presence at both ends of the market. Motorola has regained some success by going budget and it may go further in that direction with Lenovo’s backing. Sony is the original premium brand, one that Apple learned a lot from, and it’s starting to make a comeback in Japan and Europe. Will the rest drop prices or try to leverage their brands? Just how big is the premium end of the market anyway, and will it shrink as prices fall?
Where is the smartphone market headed?
It’s not easy to predict what way smartphones will go. If you look at the car market there are plenty of examples of brand power commanding higher prices. Some cars have virtually identical innards, manufactured in the same places, but a little surface styling and a different badge can make a big difference to the price.
Alternatively you could point to the PC market where price has definitely beaten brand, or take a look at the struggling premium brands in the TV market and how undercutting has pulled the rug from under their feet. The smartphone market is huge and there’s plenty of room for different approaches, but it will be interesting to see if brand power proves enough to fend off the pressure to lower prices.