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Samsung learns the high cost of the low end

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9 July 2014

Billy MacInnes“The earnings deliver a harsh reality check to Samsung that it is not Apple, but Samsung. Its strategy of selling phones at expensive prices will not work anymore, as Chinese rivals also offer good enough phones at much cheaper prices,” Lee Seung-woo, technology analyst at IBK Securities.

Seung-woo’s comments were quoted in a Reuters report as Samsung issued guidance for its second quarter that was much worse than many had expected, worse even than anything it has reported in the last two years.

He’s right, of course, Samsung is no Apple. It never has been and despite the success of its smartphones and tablets to date, it is unlikely ever to be. Some people might find it a mystery that a company selling high-end phones with the same operating system as that available on low-cost alternatives from a number of different companies can seek to charge an Apple-type premium. Whatever you think about Apple’s prices, it has actually gone to the effort and expense of developing its own smartphone OS.

But here’s the puzzle. According to reports, it’s not the high-end products that are causing the problem for Samsung. Reuters quotes HMC Investment analyst Greg Roh who states: “Samsung is most competitive in the mid- to high-end products but market demand is being driven in the lower-tier end where the biggest issue is price.”

The mid- to high-end is where, typically, Apple likes to play in any product sector it operates in, including smartphones. So, in that respect, you could argue that Samsung’s attempts to be the Apple of the Android smartphone market have been reasonably successful.

One area where Samsung is most obviously not like Apple is in its requirement to compete in the lower-end, cheaper part of the smartphone market. That’s the part where it’s getting battered, as they say in Scotland. So while Samsung’s strategy of selling phones at expensive prices appears to be working for people who want to buy expensive smartphones, it is failing abjectly for people who want to buy cheap smartphones.

Cut-rate
One solution would be to make its cheaper phones less expensive. That looks to be an increasingly likely option. After all, it’s hard to justify charging a premium over a rival Android phone that has all the same features and runs the same OS just for the privilege of having the Samsung brand on the device.

This is where Samsung is decidedly not like Apple. Despite all the exhortations from many industry experts, Apple has refused to get involved in the low-end cut-price section of the smartphone market. It shouldn’t come as a surprise to anyone given that Apple has never got involved in that segment of any market it’s ever operated in for the good reason that it doesn’t want to lose money and margin more quickly than it has to or to dilute the brand value it has built up so assiduously over the years.

While Samsung has shown itself to be adept at emulating Apple in certain ways, it has failed to grasp the full implications of the Apple model. Hardly surprising. It’s not Apple. It’s hard for Samsung to avoid the temptation of operating in the mid-to-lower end of the smartphone and tablet markets because it feels that it has to (and so do the analysts).

It’s part of Samsung’s mass market heritage to do so but it also has compete at that level to some extent because Android is such a big part of those markets. Samsung has to go where Android goes. If it doesn’t, people might question why they should pay so much more for a Samsung Android phone when they can get an alternative more cheaply elsewhere. If it does, margins get hit. To hold on to the high end of the Android market, Samsung has to be a viable player at the low end but getting involved in the low end could hurt its high end dominance.

That’s not something that worries Apple unduly because it controls the iOS platform and which parts of the market it appears in. Samsung has done a good job of copying Apple’s recipe for success to date but now it has to find its own. That’s not such an easy thing to do when the company is just another Android OEM. Nomura analyst C.W.Chung addressed that very issue in a comment to the Wall Street Journal when he argued “investors have already decided” that Samsung will struggle to differentiate itself. Proving, yet again, that Samsung is not Apple.

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