Samsung Electronics (SSNLF) had a disaster on its hands this past spring, when it debuted an ambitious new device, the "Galaxy Fold," a phone that folds open like a book, to terrible early reviews complaining of cracked screens. Not what you want in the way of first impressions for a device costing $1,980.
Now, Samsung is getting ready to put a revamped Fold on sale in September, but the consumer market appears not so enthusiastic about the ultra-expensive premium tier despite all the buzz about Fold and devices like it.
Like ex-Microsoft (MSFT - Get Report) chief executive Steve Ballmer, who blasted the first iPhone in 2007 with a snort, "$500, for a phone?", many consumers are shaking their heads and walking away, muttering, "$1,000 or more, for a phone?"
"The premium smartphone tier is peaking and we don't expect it to grow much from here," says Neil Mawston, executive director of market research firm Strategy Analytics, referring to the most expensive phones on the market.
"Customers are balking at spending over $1,000 on a smartphone and the upside for further price rises in the future is limited," Mawston told The Street in an email.
Two years ago or so, when rumors first surfaced of a "$1,000 iPhone," which eventually was revealed as the iPhone X, analysts were agape at the bravado of Apple for pushing up average prices. But most analyses on Wall Street at the time saw Apple setting a new benchmark for phones, a kind of inevitable inflation of smartphone pricing.
Apple's costliest iPhone, the "XS Max," unveiled last fall, costs a spine-tingling $1,449 for the most expensive option, with half a terabyte of storage. In addition to the Fold, Samsung's flagship high-end phone, the "Galaxy S10+," in a similar configuration to the iPhone XS Max, costs $1,249. Such devices are sold on the basis of greater memory capacity, larger displays that have so-called organic light-emitting diode, or OLED, technology for richer contrast, higher-resolution cameras and higher-capacity batteries.
Memory chips and screens are the most expensive parts of a phone's guts, according to Mawston, followed by the main processor chip and radio frequency (RF) circuitry, the camera and the battery.
But exotic technologies have found their way into simpler models of phones costing far less than the iPhone XS Max or the Galaxy S10. OLED, for example, has long been costly because Samsung has been the sole producer of the panels for those displays. But prices for OLED as a feature in a phone have nevertheless come down, and the cost will keep dropping as competition ramps up for Samsung as a supplier of panels, says Mawston.
"The vast majority of OLED smartphones in the market today are much cheaper" than the iPhone or the Galaxy, he says, more like $200 to $800. Examples include Xiaomi's Mi 8 SE, made by the Chinese startup, which is at the low end of that price range.
Mawston expects that most smartphones sold worldwide will be OLED models in two to three years' time.
That's not to say Apple and Samsung aren't selling any phones at high prices. Apple sold $26 billion worth of iPhones in its fiscal quarter ended in June, it reported on Tuesday.
It may have come at a cost to Apple, however, as the total was down 12% from the year-earlier sales for iPhone. CEO Tim Cook emphasized that the decline was an improvement from a 17% drop in iPhone sales in the prior quarter. Apple stopped releasing iPhone unit shipment numbers at the end of last year, so it's not entirely clear how its average selling price has risen or fallen, but there is every indication Apple is losing market share as it pushes pricey phones.
Data released late Tuesday by Strategy Analytics showed the iPhone line dropping in the second quarter to 11.1% of global shipments, from 11.8% a year earlier. Apple may have sold 38 million units in the quarter, the firm estimates, down from a reported 41.3 million a year earlier. Apple took third place in market share behind China's Huawei, which has emulated Samsung's playbook over the years in selling a wide variety of models, from cheap to pricey. Huawei's market share jumped about two points as it sold many more phones than a year earlier.
For its part, Samsung, which remains in the top spot by unit sales, clearly faces pricing pressure. Although it increased its unit sales and market share, it did so by dint of "strong" sales in "midrange" and "entry segments" of the phone market, observes Mawston, and "its profit margin declined due to fierce price competition," he says.
Samsung will continue to bet on ambitious projects like the Fold, and Apple will keep generating pricey models, both because they distinguish their brands and because a successful run of a premium phone can boost profits over time. Many of those high-end technologies also eventually find their way into cheaper-priced phones.
But in a world where phone companies offer less in the way of subsidies, and more and more consumers find that the features they really need can be had in a merely average phone, it's going to be tough for prices to budge overall. Apple and Samsung will have to try a bit harder to prove to the world that the most expensive bells and whistles are worth paying up for.
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