Samsung Galaxy Note 5 And The Case For Lower Device Pricing

Samsung Electronics (PINK:SSNLF) has launched two new high-end phablets, dubbed the Galaxy Note 5 and the Galaxy S6 Edge+. While both devices look impressive, sporting strong hardware specifications and elegant industrial design, Samsung seems to be sticking with its premium pricing strategy, which has seen mixed results of late. The Galaxy Note 5 32 GB will retail at $700 on T-Mobile, while the Edge+ will sell for $780 onwards, well above the market average for flagship Android phablets. Although pricing is a big lever of a smartphone vendors’ earnings and valuations, Samsung is not currently in a particularly strong position to charge a huge premium, given its recent market share losses (21.7% share in Q2’15 vs about 25% a year earlier, per IDC) and the current competitive landscape. In this note, we explain how price optimization could prove a net-positive for the company (related: Samsung Q2 Review: The Smartphone Turnaround Isn’t Going As Planned).

See our full analysis for Samsung Electronics

Trefis has a $1,250 price estimate for Samsung, which is over 25% ahead of the current market price.

Samsung’s Premium Pricing Could Backfire

While Samsung pioneered the large-screen form-factor, it now faces unprecedented competition in the category from the likes of Motorola, Xiaomi and OnePlus, which have launched similar models at roughly half Samsung’s current price points. Product differentiation is extremely low since all these devices run versions of Google’s Android. Samsung’s software implementation doesn’t offer much above and beyond its rivals. For example, the upcoming Motorola Moto X Pure offers largely similar specifications as the Note 5 and is priced at just $400. Other than the dual curved screens on the Edge+ and a stylus on the Note, there is not much that differentiates the Samsung devices that would justify a customer paying close to double for them. The new Note and Edge devices also seem like a tough sell when compared to Apple’s (NASDAQ:AAPL) similarly priced (and arguably more differentiated) iPhone 6 Plus, which is expected to see a refresh next month.

Wirless Customers Becoming More Sensitive To Device Pricing

Moreover, wireless customers – particularly in the U.S. – are becoming more sensitive to the unlocked contract price of devices, since wireless carriers are moving to decouple phone and device payments through subsidy-free plans. In essence, these plans allow customers to pay lower monthly service fees by paying for a device upfront or in installments, meaning that picking a lower priced device would allow for lower monthly device billings. Verizon (NYSE:VZ) just ended subsidies for all new customers, while AT&T (NYSE:T) has been adding most of its new users on installment plans. While we expect Apple to navigate this shift comfortably on account of its brand pull, Samsung could see headwinds from lower-priced competitors, since the Android market is much more price sensitive. (related: Could Verizon’s Move To Nix Subsidies Hurt Apple?)

 Early-Cycle Discounting Hurts The Brand, Creates Missed Opportunities

Samsung has been no stranger to discounting early in the product life cycle. The company just announced that it would be “adjusting” prices on its current flagship devices – Galaxy S6 and S6 Edge – likely due to weaker than expected sales, and we saw similar moves with last year’s Galaxy S5 as well. We believe this trend may be inevitable for the two new phablets as well. However, the practice of pricing a product high and beginning to discount it a few months later can be detrimental, since it disgruntles early adopters and generally signals a lack of brand cachet – something a vendor can ill afford in the dynamic and perception-driven smartphone market. The practice can also cause a vendor to lose out on early sales when launch momentum is high.

Price Cuts Can Drive Smartphone Shipments And Demand For Components

It may benefit Samsung to price its devices a bit lower right from the launch. Although the company may not be able to (or want to) compete with the upstart Chinese players on price, given their largely web-based marketing and distribution models, it could leverage its advantages on the component and manufacturing side. Samsung sources the biggest cost drivers of its flagship smartphones– including displays, application processors, RAM, NAND memory and some modems– from its internal components business. For example, Samsung sources over 60% of components (by value) for the S6 Edge device internally. ^[1] More than 45% of Samsung’s semiconductor revenues come from inter-company sales, and a bulk of this is likely smartphone related. ^[2] Lower smartphone ASPs could help stem market share losses, while driving business for the company’s high-fixed cost, high-margin components unit.

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1. Samsung Galaxy S6 Edge Pricier to Build, Cheaper to Buy Than Comparable Apple iPhone 6 Plus, IHS Teardown Reveals, IHS, April 2015 [↩]
2. Samsung 2014 Annual Report [↩]