Price vs brand in the mature smartphone market

August 20, 2014

oneplus one vs samsung galaxy s5 aa (27 of 29)

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.

Best smartphones 2013

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.

Hugo Barra Xiaomi -19

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 galaxy alpha press shots (9)

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.

Comments

  • Aki I.

    What is ASP?

    • Dragonscourgex

      I could be wrong here…but going from how they use it, I would have to guess average selling price.

      • Simon Hill

        It is indeed average selling price, apologies for not making that clear.

    • Danny switcher

      I think ASP stands for Application service provider
      :/

      • http://www.theveboy.com/ Mehdi

        A company providing Internet ? Dude I think that’s ISP.

    • Милен Стефанов

      “At Some Point”

  • Groud Frank

    I’ll say this much: The “quality” and power of a smartphone isn’t just limited to the big names like Apple and Samsung. The only thing stopping me from getting a Xioami phone is the fact that they don’t offer anything with the power of the Mi4 with the size of a Note 3. Both hardware and software(especially firmware updates) are important to me. These big Android OEMs like HTC and Samsung are busy pushing out phones to make a profit that their “outdated” but very capable phones are ignored in favor of “the next big thing.” I was never a brand person but brand is becoming more and more irrelevant to me.

  • J_Pod

    I hope it doesn’t lead to terrible quality like the cheap tv’s. I had to return one three times before I got one that didn’t have broken pixels or many other issues. Finally I have up and stuck with the last one that had no problems but one stuck pixel. If phones go that way… Shudder

    • Mike Reid

      EVERYTHING is going that way.

      Once upon a time, TV repairmen would come to your house… And change a vacuum tube or 2, or take it back to the shop. LOL.

      Now we just throw a broken TV in the latest landfill and buy a new one every year or 2. Phones are pretty much the same.

    • Jerry Rich

      A broken pixel is the worst thing that can happen to a TV. That happened to me once.

  • Mike Bastable

    Nice to read this kind of article here. Interesting and well written. Thanks

  • Fer

    Call it premium if you like, but every Android phone has cheap quality, and terrible performance, Apple has just overpriced hardware, a world with only those 2 options is boring, I want something different from a laggy trash bin or a highly expensive fruit

    • Bentley

      “Every Android phone has cheap quality, and terrible performance”. You must be tripping man. -_-

      • Jerry Rich

        Woof!

    • MasterMuffin

      So it’ll be one Windows Phone, Troll Sir?

    • Hamza

      Ever heard of htc one and one m8? If you call those phones cheap quality then you definitely lack intelligence.

      • Cole Raney

        No, you might just think metal is rubbish for a phone.

      • Jerry Rich

        I have heard of them but I want a premium phone.

        • Stephan Hall

          Good one!!!

      • Fer

        Read of it, and still cheap, android just makes everything cheap quality, period

    • Jerry Rich

      Maybe you can find a hotline or a friend to help you through this depressing time. Don’t do something rash because there are only two options. I’m sure there will be a third option for you at some point.

  • MasterMuffin

    I feel like the average consumer won’t consider a random brand just because it’s cheap. They choose from the big brands they know, find the one that looks nice (and has cool buzzwords) and either find the place that sells it for the lowest price or buy it from the familiar store near them. Most manufacturers won’t drop the prices of their flagships, but rather introduce lower priced models that are still overpriced for the hardware they offer.

    • Jerry Rich

      I think you’re on to something. I’m just not sure what it is.

      • MasterMuffin

        :)

    • Stephan Hall

      Then there are groups of consumers resembling many here ….. on the fringe ….. :) Just saying!!!

  • Hamza

    The cheaper they get, the better for us.

    • Jerry Rich

      Meanwhile apple continues to lose market share.

      • http://www.raghuvenmarathoor.blogspot.com Raghu V N

        Yes, but the profit share is not that affected, I guess.

  • abazigal

    The Apple brand is powerful, and not unjustly so. Apple has earned my trust the old fashioned way – by selling me products which work as advertised and amongst other perks, actually hold their resale value pretty well.

    I say let the competitors fight for the lowest common denominator with the lowest possible margins and lowest quality products. They’ll surely win over those that consider price alone when shopping, but there are still plenty of us that consider more than just price, which has been Apple’s business model since their inception. I think it’s bizarre to think this would suddenly change unless one doesn’t understand Apple or business in general.

    • SaRPeR

      Those iSheeps are paying flagship price for a phone that has mid-range specs hahahaha .

      • Karly Johnston

        A 64 bit ARMv8 processor that runs circles around your 32 bit dinosaur. jajaja

      • Marc Perrusquia

        I think android is easily the superior is, the only thing midrange about the iPhone is it’s ram that’s it. The screen is gorgeous and the A7 is a beast. I use both, I have a nexus 5 for personal use and a 5s for work and both are fantastic. I even just got my one plus one invite and got the 64gb with standard shipping for $363. What I’m trying to say is you shouldn’t right the iPhone off its every bit as smooth as other android flagships, and has the second best design language on the market after HTC. Don’t blindly hate Apple feel free to complain about ios it’s far too locked down but don’t call the 5s midrange it’s a true flagship.

        • Stephan Hall

          I agree. But the iPhone cannot justify the price. My only criticism other than price is lack of the ability to customize the experience. But it is a nice device.

    • Michael Samsara

      But what price security? I suppose if you are willing to allow yourself to be dictated to by Apple in this way or that as they deign fit to allow you to use your products – then, more power to you – or at least as much as they deem fit to allow you.

      One of the main reasons I observed – at that time I was selling cell phones – people bought Apple was not because they truly had an appreciation of any of the things you alluded to re Apple’s much vaunted dedication to quality, but rather because someone else who was equally uninformed and willing to follow in others blind foot steps suggested they buy one, and arguing with them about how they were paying possibly double what they needed to – to get what an iPhone would give them – invariably fell on deaf ears.

      But, that is the power of marketing – and the mark of a truly excellent snake oil salesman.

  • Andrew T Roach

    The Exynos in the Galaxy Alpha is a state of the art SoC built on the 20nm process. And 720P really isn’t a downgrade when you consider that battery life and faster performance is gained in exchange. The screen is still quite sharp and very well calibrated (better than the S5).

    Infact, this is the first device that Samsung has actually had to design in a while. Small devices are thermally constrained and have less room for batteries. Performance, battery life and device size all have to be balanced. Big devices always have enough room as the SoC and internals don’t change.

  • Muhammad Iskandar Joel Deduyo

    When Samsung increase price for a handset, they say expensive, when apple is expensive, they say premium….hehehhehe…it all marketing approach that what is brand all about!

  • Brian Samuel

    Nothing is inevitable in the smartphone market. Just look ten years ago, Nokia, Ericsson, and Motorola were the three leading mobile handset makers. Now, none of them are independent companies making handsets. The market changed dramatically because the shift to smartphones enabled new handset companies to become the market leaders.
    Today, it’s Apple and Samsung, and that’s our forecast for the future but nothing is inevitable. Other companies can change that. All they must do is, they must use capabilities from outside of mobile to innovate. Samsung uses its component expertise. It uses its wide brand marketing to boost its mobile share. Apple takes technology from the Mac and trickles it down into the iPhone and innovates with the iPhone and takes it forward. Apple has an ecosystem that extends not just from the hardware but the software and the content distribution to the App store which is all tied together. It’s integrated. Apple is trying to move into components and extend its innovation, become more vertical, and entrench its position. Samsung is trying to extend from its hardware expertise into software with services like Samsung KNOX for the Enterprise, Samsung Hub with music, video, and apps. It’s trying to emulate Apple in content and services.
    The companies that have struggled in mobile enhancements in recent years have typically been mobile market peer plays. Its companies like Blackberry, Nokia, and HTC have struggled because they haven’t had these adjacent expertise from outside of mobile. The challenges to watch are those that have the ability to create an ecosystem and to build brand, hardware, content, and services from outside of mobile and take it into the mobile ecosystem.
    So companies to watch are some of the big Chinese companies like Wallway and Zeta-E that have expertise in mobile infrastructure, companies like Lenovo that have a brand from the PC market they can extend into mobile, and companies like Sony that operate in the camera market, in the movie industry, in the music industry, and in the games industry.
    These kinds of companies that have this wide expertise that they can apply to mobile are the ones to watch and the ones that hopefully can change the market structure again. Additionally, all the mobile operators want to have more choice. They don’t want to have just Apple and Samsung as their key suppliers for handsets. They want more choice, and they will invest in marketing and distribution if they see challengers starting to get market momentum, and that’s one of the big risks for Apple and Samsung, they’re very success makes them less attractive for the mobile operators that distribute the iPhone and Galaxy Smartphones.

  • jay

    apple is pretty good. but do i have to like it? no because other brands can do a good job too. i have a oneplus and that works for me just good. paid half the price and waiting for the next one and still sell it for 125$.

  • Rama TT

    *Agreed that companies like Xiaomi and Motorola are giving nightmares to the more established brands but that’s not to say that these brands will slowly lose all their value. For example despite reporting a serious drop in profits Samsung did manage to improve its revenue in the US and the Samsung Galaxy S5 sales in the US have been 50% more than the Samsung Galaxy S4 sales of yesteryear. The same thing was being said about Apple a few years ago but still despite losing hefty market shares most quarter Apple still manages to post more profits than any other manufacturer. Many a times market share does not mean everything profits also matter.

    *As I said despite profits being 25% less for Samsung they still manged to earn more than any other Android vendor in the market. In fact other Android vendors hardly earn anything. The total combined profits of Apple and Samsung are almost 105% or so. Yeah its 105% and no I am not drunk the extra 5% come into picture if you consider the losses companies like LG/Sony/HTC made a few quarters ago. Companies like Xiaomi and Micromax hardly manage to earn any profits. Take Xiaomi for example they are selling devices at almost cost price and hardly any profit on hardware sales. You can’t expect companies like Samsung to start competing at those prices because they spend billions on advertising and R&D and their major source of revenue is hardware profits.

    *In my opinion companies like Samsung and LG will lose market share rather than reducing prices to the level of Xiaomi which are not manageable by them or rather which would not be enough for their expenses. I will readily accept that in future companies like Samsung will lose market share in countries like India and China to some extent but then to the market share which they are losing are to the companies who are hardly making any profit. And even though Samsung loses market share in India and China they will still manage to do well in countries like US/Western Europe/South Korea/Japan etc etc. In developed countries like US for example I don’t think companies like Xiaomi will be able to challenge the might of Samsung.

    *In the US market the contract system is followed where carriers subsidize the cost of devices and the 900$ or so iPhone or Galaxy S5 over there “”appears”” like 200$ in the US. Although carriers manage to recover the cost over the 2 period contract but still the consumer has a sense of false belief that he is only paying 200$ for the device. Now in such a market if Xiaomi comes with even a 230$ Xiaomi Mi 3 people would “”believe”” its expensive. Although off contract is becoming popular in US the rule of the thumb is contract and as long as contract systems prevail which I guess they will don’t expect iPhones or Galaxy to lose any ground in US.

    *On the other hand in countries like US the success of a device very much depends on the carrier relations a particular company has with a carrier because of the contract nature followed over there. Carriers don’t openly provide every device on contract. Many a times only devices which they feel have the potential of doing well are sold on contract. In case of Xiaomi as I have said before they really don’t manufacture devices in bulk and given the people of US hardly know about the brand initial demand will as usual be low and not much of the public will warm up to the device initially. Carriers know this and won’t stock the device. If sold on full retail price the Mi 3 would cost at least 230$ in the US which is 30$ less than the iPhone 5S or so and despite how good Mi 3 is its definitely no where near the 5S for the very least and even the most tech savvy wont go for Mi 3 for just saving 30 bucks. I know that overall on contract the iPhone 5S would end being expensive but still how many people over there would actually figure out this and even for contracts several theories are present. Some people say its cheaper some say expensive. But anyhow as of now and the foreseeable future contracts are to remain in US.

    *Next people in US are not as poor as other developing countries. People over there earn well and can very well afford expensive phones. But still this is more of a personal belief rather than a good point.

    *Next up is litigation and patent wars. US is a country with very strict patent laws and no matter how much I like Xiaomi I won’t refrain from saying that they copy Apple. In a very worse manner that too. Its visible all over their products. If Xiaomi were to ever enter US and gain traction I am pretty sure Apple is gonna sue the shit out of them. They did it with Samsung and won’t spare Xiaomi. At least Samsung was earning enough to face the 1 billion $ of fines they have seen from Apple I don’t think Xiaomi posses that kind of wealth that they can suffer litigation. What’s even worse is that Xiaomi copies Apple even more than Samsung then the litigation fee can also be equally high.

    *Next marketing matters a lot in US. Both Samsung and Apple have big marketing budgets and companies like Xiaomi don’t even spend on marketing in a commercial manner let alone putting up an Ad during Super Bowl or something. Companies like Motorola LG and Sony which have less marketing budgets often end up as losers and to be truthful for the past several quarters most manufacturers except Samsung and Apple are losing market share in the US and its not because Samsung and Apple are coming up with some really innovative products. NO!!. In fact the G2 HTC One M7 and even Moto X were far better than S4 but still it all went in vain just because these manufacturers like LG HTC and Motorola did not have a marketing budget as good as Samsung.

    * As far as I have seen in the electronics Industry the cheapest wins.”jo sasta hai woh bikta hai”. The TV industry and the PC industry are very good examples of the same. The TV once a cash cow for Sony is now Samsung’s field. Same way Lenovo dominated the PC and lapotop industry. But then again PC and TV are mostly individual products sold separately. For example in the TV industry you still don’t have DTH operators subsidizing the cost of TVs same way broadband providers don’t subsidize the cost of laptops even in nations like US that’s why did the once mighty and premium players fell all over the world. In short the product and services did not share any relation in the PC and TV industry.

    *The smartphone industry however is different in US etc etc as long as carrier subsidies continue I don’t think its gonna be a challenging way for Apple and Samsung.In the smartphone industry of US etc you have services and products linked. In India you do not have any kind of meaningful subsidies and that’s why do I expect the branded players to lose market share. Even in China the operators are starting to cut down subsidies.

    * Even if we leave all this as I said only few players are making serious money in the smartphone market.The countries like US Japan etc where high end smartphones are sold the profit made on every handset is almost triple the cost of say a 5k handset like Samsung Galaxy Star Duos. Losing market share would not mean much to Samsung and LG as long as they lose it to players who are not making money.Just remember for every China there is a US. For every India there is Canada. For every Vietnam there is Japan. Even if manufacturers lose market share in India CHina etc they still have other developed countries to look forward to.