The effects of saturation in the high end smartphone market can be seen not only in Samsung‘s financial results but also in its new flagship smartphone, the Galaxy S5. Unveiled at the Mobile World Congress in Barcelona this week, the latest from the Samsung stable is packed with a wide range of features and top-notch hardware components. However, like its predecessor, the S5 is little more than an iterative upgrade. Samsung has not taken any major risks with the overall design and feel of the phone, making it look very similar to the S4 from the front and only slightly different at the back. The display looks great but, at 5.1 inches, is only slightly larger than the S4 and is made of a similar 1080p, Super AMOLED panel. Under the hood as well, the S5 comes with only incremental upgrades, with a faster 2.5GHz quad-core processor and a bigger battery that should improve the overall user experience, but nothing truly revolutionary. Even the integrated fingerprint scanner adds little novelty to the S5, with the new unlocking feature having already made an appearance in Apple’s iPhone 5S about five months ago.
However, the lack of a ‘wow’ factor should not take away from the S5, which is Samsung’s best Android smartphone to date and could, in all likelihood, outsell its predecessor. A bulk of smartphone sales at the high end is being driven by subsidy-driven upgrades, and the S5 seems a good enough upgrade for many of Samsung’s existing customers. This is especially true in developed markets, where users of the S3 and prior-generation smartphones will be the most keen to upgrade after their two-year postpaid contracts expire this year. However, the fact that the S5 isn’t really a game-changer makes it less likely that Samsung will make significant high-end share gains this year. This is an indicator of the peaking innovation curve at the high end of the smartphone market, where even Apple is struggling to add incremental value with the iPhone. With the basic smartphone paradigm set and the market flooding with value players that are pushing down prices, Samsung will probably have to work harder in the coming years to not only ward off competition but also justify the premium prices of its high-end smartphones.
Samsung has done well to capture almost a third of the rapidly expanding smartphone market so far. However, with competition increasing at the low end of the spectrum and saturation seeping in at the high end, it has become tough for Samsung to maintain its past mobile growth. Last quarter, Samsung’s mobile division posted its first sequential revenue decline in nearly three years despite operating in what is usually a strong quarter for the company due to the holiday season. Samsung expects “price / product competition to intensify” further in 2014.
To be sure, the smartphone market is still growing at a faster rate than the overall mobile phone market as smartphones cannibalize feature phone sales. However, most of that growth is coming from the low end in emerging markets, where profit margins are lower and being rapidly eaten into by rising competition. Apple’s decision to not enter the sub-$400 smartphone market so far has mitigated some of Samsung’s near-term concerns, but the iPhone maker is facing its own growth concerns and looking to aggressively pursue growth opportunities in emerging markets. It recently signed a deal with NTT Docomo and China Mobile to sell both the iPhone 5S and the 5C, thereby unlocking a huge subscriber base of over 800 million that has so far been outside Apple’s reach.
Impact on Samsung ASP levels
With Apple entering new markets, Samsung’s opportunities of increasing its high-end market share are diminishing. We expect this to have a negative impact on the average selling price of Samsung’s mobile devices going forward. In the last three years, Samsung’s mobile ASPs have increased by a CAGR of over 31% due to a rising sales mix of smartphones. However, last quarter saw the average price of Samsung’s handset sales decline by almost 7% sequentially and more than 1% year-over-year, in what we see as the clearest sign of the impact of heightened competition. While increasing marketing spend in emerging markets could help Samsung drive additional high-end sales, this could be largely offset by carriers in developed markets clamping down on subsidies in order to boost margins. In the U.S., carriers have introduced policies to increase the smartphone upgrade cycle from 20 to 24 months, causing smartphone activations at Verizon and AT&T to decline y-o-y by a combined 17% last quarter.
With fewer market share opportunities to pursue at the high end, Samsung has rightly chosen not to experiment much with what has been a winning formula. Changing the look and feel of a product that has done so well for the company in recent years could have caused dissatisfaction among existing users that have grown used to the Galaxy S products. Since we expect a majority of high-end device sales to be driven by existing users upgrading their smartphones, it doesn’t make much sense for companies to make design changes that decrease familiarity. This strategy is something that Apple has also followed, choosing to experiment more with display sizes and the back cover rather than the overall look and feel of the iPhone. The lack of innovation is symbolic of the smartphone market maturing, causing companies to increase their R&D budget allocation to creating new software features and increasing manufacturing efficiencies rather than making big-scale design changes.
Credits to Forbes.com
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