Samsung Misses As High-End Smartphones 'Hit A Wall'
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NEW YORK, NY - APRIL 25: Fans get hands on with the Samsung Galaxy S4 at the Samsung Experience Shop Best Buy Official Launch Event at Cunard Hall on April 25, 2013 in New York City. (Image credit: Getty Images for Samsung via @daylife)
Samsung’s rapid growth in the high-end smartphone market may be reaching a plateau, even as the company predicted a record quarterly profit for the second quarter. Sales at its electronics division grew 20% to 57 trillion won, and the company said its second quarter operating profits would be between 9.3 and 9.7 trillion won. While that represents a 47% increase from last year, it’s up just 8% from the previous quarter. The pace of sales in its mobile division – representing roughly 70% of profits – appears to be slowing.
Mark Newman of Bernstein Research puts the miss down to the high cost of launching Samsung’s flagship Galaxy S4 smartphone, a feature-rich device launched at a lavish event at Radio City Music Haul in the spring.
Samsung already outspends other technology giants like Apple AAPL -1% and HP in marketing its products. It spent $881 million on measured advertising in the U.S. last year, and $4.3 billion globally, according to AdAge. Samsung recently said it would lower its marketing spending but Newman points Samsung has other costs to digest too, notably its new partnership with Best Buy and the launch of its Knox service.
Samsung has more than 30% of the global smartphone market by sales in the first quarter, according to IDC, but it as well as rivals HTC , BlackBerry and Apple all face a maturing market for their high-end devices. With BlackBerry, HTC and now Samsung having posted earnings in the last week, all three have reported weaker-than expected results in the second quarter of 2013, says analyst Brian White of Topeka Capital markets.
“The higher-end portion of the smartphone market has hit a wall due to high penetration rates and high price points,” he said. Smartphone ownership in the United States and Europe is getting close to 60%, squeezing out the opportunity to find new buyers of pricier smartphones, and exacerbated by the trend for mobile operators to cut subsidies on these phones.
Apple is widely expected to combat the problem with a cheaper, $350-$400 iPhone aimed at developing markets like China, where subscribers to devices with 3G connections grew 85% year-on-year in May, according to Topeka’s White, but still only represent 26.6% of China’s wireless subscribers. White expects Apple to use a name like the iPhone Lite or iPhone Mini, and for the cheaper device to hit shelves this year.
Though Samsung benefits from a wider product portfolio and devices at varying price points, it is similarly releasing a Galaxy S4 “Mini” next week in the United States — it just isn’t that much cheaper than the full-fledged S4, according to a early online reviews.
Samsung is best know for moving quickly to cater to new market demands, in spite of its enormous size, and according to Reuters has already filed a trademark in the United States for “Samsung Gear,” The moniker may well apply to wearable devices, and a new revenue source that could boost its growth prospects.
But having feasted on higher margins for the better part of the last two years, Samsung must like it or not now downshift towards catering to developing markets and their insatiable demand for cheaper phones. It has developed an open source operating system called Tizen that will find its way on to low end devices, but, Brian Park at Tong Yang Securities states, there is still “a big uncertainty about how Samsung will respond to the low-end market.”
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