AH Samsung Galaxy S6 Plus + 2015 Chris-12

LG And Samsung Show Declining Smartphone Profit Margins

October 30, 2015 - Written By David Steele

2015 has introduced and reinforced a number of trends within the Android universe. We’ve seen a number of developments that have pushed our smartphones forwards: we’ve seen System-on-Chips moving to a smaller process size so as to reduce heat production and power consumption. More and more flagship handsets have moved to a QHD or 1440p resolution display and we have seen another push towards smartphone camera optics, which are trickling closer to “real” camera optics and image quality. Another trend is the rise of the mid-range smartphone, including the so-called super-mid-range devices. Mid-range can mean either middling specifications or a middling price; it often means both, with manufacturers opting different compromises for individual models depending on their preference. We have seen a raft of new models designed for this mid-range territory, such as the Google Nexus 5X, the Motorola Moto X Play, the OnePlus 2 and OnePlus X, and the Wileyfox Storm.

This trend has important ramifications for the market and the first is that it is increasing pressure on margins. Mid-range devices are somewhat cheaper to build for the manufacturers simply because flagship and high end models use premium components. Some mid-range models use previous years’ flagship components, such as the just-announced OnePlus X, which uses the Qualcomm Snapdragon 801, a flagship chipset from eighteen months ago. However, whilst the component cost of a mid-range smartphone is less than a flagship device, the development, software engineering and construction costs are usually similar (putting aside curved glass). The price to customers on the street is typically substantially less than a flagship model, which means that the manufacturer gets less profit per unit sold.

We have seen ongoing evidence of this downwards trend on smartphone prices and for the South Korean market, where two of the more significant Android smartphone device manufacturers, Samsung and LG, have recently announced their third quarter results. Samsung IT and Mobile division’s figures showed sales of 26.61 trillion South Korean won and a profit of 2.4 trillion won. This shows an increase in sales but a reduction in profit. Samsung sold more devices but profits were down. LG’s equivalent mobile division reported sales of 3.7 trillion won and operating losses of 77.6 billion won over the same period. Considering Apple into this equation, they do not have a mid-range model in the pricing sense and sales revenue is up 21% and profit is up 31%.

This time last year, the industry was saying how important the Galaxy S6 was to Samsung and how it was important that the electronics giant released something different. At time time, it was suggested by some that Samsung could take the market by storm and release a flagship device at mid-range prices. This didn’t happen: the Galaxy S6 was released at a high price and Samsung’s profit margin has been reduced. Perhaps next year we will see a different strategy?