Budget smartphones erode sector's profitability

Budget smartphones erode sector's profitability
Manufacturers of high end smartphones, such as Apple, may come under pressure as demand rises for cheaper handsets.
Published: 16 January 2013 - 7:38 a.m.
By: Roger Field

The smartphone market will diverge in the next five years as sales become dominated by low-end devices, priced below $150, and high-end devices, priced above $250, according to a study from Informa Telecoms & Media.

The expensive smartphones will find their market share shrinking from 85% of total smartphones sold in 2011 to 33% in 2017. In contrast, the low-end smartphones will gain enormous amount of market share over the years to account for just over half (52%) of the smartphones sold in 2017.

The smartphone market is undergoing dramatic changes whereby demand will be increasingly polarised between expensive and heavily-subsidised handsets on the one hand and affordable devices targeting the emerging markets and sceptical users in the developed world on the other hand. As a result, price erosion is looming as competition becomes more intense.

The average smartphone price will drop from $188 in 2011 to $152 in 2017 as a result of it balancing the huge demand for entry-level smartphones in emerging markets and the demand for “super-smartphones” in developed markets. The devices’ average gross margin is expected to remain flat – in the range of 20 -25%. This is because vendors will increasingly be under pressure to absorb the cost of innovation while keeping up with price competition. To remain profitable, a number of vendors will have to continue to reduce their operational costs and some will struggle to maintain profitability.

“As the market develops, the supply chain will increasingly be divided between two camps – the innovators who will continue to introduce new features and high-performance components to the market place and followers who will take this innovation to the mass market in later years,” said Malik Saadi, principal analyst at Informa Telecoms & Media.

These changes will push some established manufacturers to reposition themselves in the new environment and come out with more effective handset-pricing strategies. Only a few manufacturers will have the ability to operate right across the market, the great majority will have to focus on particular segments to reduce cost and maximize margins.

A number of established vendors, including Nokia, RIM, LG, HTC, Motorola and Sony, will find it hard to adapt to the new smartphone landscape as this could take them away from their core business, servicing the core smartphone market. These players will have to make a strategic decision to either fight in the high-end segment, a market strongly monopolized by Samsung and Apple, or alternatively face stiff competition by assemblers and Chinese ODMs in the low-end segment of the market.

“In any case, these players will have to align their pricing strategy with market demand if they want to survive. The new environment will make it hard for all vendors to achieve a balance between generating scale and maintaining decent margins,” Saadi added.


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