Samsung, Apple have margins on their minds

An employee displays a Galaxy S5 smartphone (left), and new Samsung Gear (centre), and Gear Fit wristwatch devices during a news conference in Barcelona. The company has knocked around a tenth off the price of its Galaxy S5 in South Korea.

Reuters/Seoul

As the smartphone action shifts to the mass market, leaders Samsung Electronics Co and Apple Inc are under pressure to make their high-end phones more affordable to revive sales. And that may spell trouble for already-softening margins.

Samsung, which said on Tuesday it would likely post a second straight quarterly profit decline, has knocked around a tenth off the price of its Galaxy S5 in South Korea, in the first such move for a marquee smartphone launch – the S5 rolls out globally tomorrow. And it’s throwing in a free gift pack of media subscriptions and web apps worth 600,000 won ($570).

The mass market – where a smartphone can be had for as little as $25 – is the new mobile device battleground, as high-end growth eases off with sales slowing in mature markets. Japan, for example, may see smartphone shipments shrink this year, according to researcher IDC.

Samsung’s flagship S5 price cut suggests the South Korean firm wants to encourage users to trade up to a fancier phone – at a potential cost to its margins. Samsung’s mobile business operating margin dipped to 16% in October-December from 18% over the whole of 2013.

“It reflects how much Samsung is agonising to secure margins. They’re now offering premium models at lower prices as the demand outlook for high-end phones remains uncertain,” said Lee Seung-woo, an analyst at IBK Securities.

Premium smartphones tend to be priced at above $300 and pack in more features, such as more powerful processing power, high resolution display, better cameras and fingerprint reading. With the S5, which has few hardware improvements from its S4 predecessor, industry watchers reckon Samsung is aiming more at a broad mass market than tech savvy users.

To be sure, Samsung has a far broader product line-up than rival Apple, and it has some leeway to trim prices given that manufacturing costs have fallen. Lee Min-hee, an analyst at IM Investment, reckons the total cost of production materials for the S5 – from the battery and screen to the processor and sensors – will be 10-15% lower than for the S4.

While this allows vendors to make quality phones for less, it makes it tougher for them to maintain a premium brand image.

“Samsung needs to be very clear about the market segment it’s pursuing,” said Clement Teo, analyst at Forrester Research in Singapore. “Take Apple – it didn’t drop prices on its iPhones, even with the new models. This helps it maintain a margin premium and attracts a certain loyal user base.”

But Cupertino, California-based Apple is also taking note of the growing potential of the mass market. Internal documents revealed during an ongoing US patent trial against Samsung indicates some at Apple felt the company priced itself too high.

According to an April 2013 presentation filed to a US court, executives had debated plans for Apple’s 2014 fiscal year and concluded that consumers wanted what it wasn’t offering: cheaper phones – for less than $300 – and bigger screens.