Taipei: Samsung’s blockbuster earnings on Thursday gave voice to a growing whisper about a surprising trend in the global smartphone market.
While the general consensus has been that competition is weighing heavily on prices, pushing handset makers to cut in order to drive volumes, the reality is that there’s real strength at the top end.
It’s true that an early release for the latest version of its flagship handset helped Samsung clock up stronger sales in the first quarter. But a tripling in first-month shipments for the Galaxy S7 compared with the S6 a year earlier probably reflects renewed demand for premium devices that stand out from an increasingly noisy and crowded catalog of mid- and low-tier smartphones.
Exhibit A in the case for the high end is Huawei. A strong push for models such as the P8 meant that the average price of the Chinese company’s phones climbed 17% last year, according to International Data Corp. (IDC). Unit shipments jumped 45%, with the premium segment accounting for a significantly larger proportion of the total.
Apple’s average selling price rose more than 7% in calendar 2015, according to IDC data, with its shipment volume increasing 20%. The other major player to see gains from selling more-expensive phones was ZTE, with a 5.8% markup in price and a 20% jump in volumes. According to Counterpoint Research, the highest tier widened its share of total volume. So too did the bottom end, while the center got squeezed.
Given the gain for the cheapest models, it would be wrong to write off price cuts as a marketing strategy. Still, the price-demand dynamics for smartphones suggest that higher volumes driven by discounts may not translate to increased revenue (and will certainly squeeze profit per device). Whether you’re a Beijing-based startup or a Cupertino-based behemoth, the end-goal ought to be boosting sales and not market share.
The experience last year of Apple, Huawei and ZTE suggests that smartphones may in fact be a Giffen good—a product for which demand increases as prices rise. If this is indeed the case, the entrenched theory that price cuts are the only way to drive demand needs to be rethought. Bloomberg