For Smartphones, an Industry-Wide Surge to the Low End of the Market

Stellar quarterly results from both Samsung and Apple couldn’t mask an inexorable change that is sweeping the smartphone industry: Increasingly, these firms are seeing greater and greater success in the low end of the market, resulting in ever-higher unit sales volumes but much lower profits.

Samsung, for example, sold an unprecedented 76 million smartphones in the previous quarter, extending its already wide lead over Apple and other competitors while earning a $6.9 billion profit, two-thirds of that from smartphones and other mobile products. But the firm is also a victim of its own success and was compelled to warn investors that growth was slowing.

The culprit is high-end smartphones like the recently released Galaxy S4. It’s a bestseller, and its high margins helped propel Samsung’s profits. But increasingly, consumers worldwide have turned to lower-end and less expensive smartphone models. And Samsung has adapted to that change by selling an ever-growing family of smartphones that meet those needs. So it's selling more units than ever before, but it makes a smaller profit on each.

Apple is currently the number-two maker of smartphones, but its market share has fallen sharply over the past few years because of this same trend: Apple makes only one smartphone, the iPhone, so it has been forced to keep aging models from yesteryear in the market in a bid to seize some low-end sales. The strategy has worked, sort of: Sales of the three-year-old iPhone 4 and two-year-old iPhone 4S now represent about 50 percent of all iPhone sales. This mix of new and old products has helped Apple slow but not stop its market-share losses, albeit with much lower profits on the older devices.

Apple is allegedly going to change tactics this fall and begin selling two new iPhone models, a high-end iPhone 5S that could replace the current handset and a lower-end iPhone 5C that will use cheaper plastic parts and replace the ancient iPhone 4 and 4S. (It’s possible that Apple will continue selling the year-old iPhone 5 to maintain a three-model product family.) But it’s not clear what, if anything, this change will do to lift market share (let alone profits) in the long term.

Of course, Samsung and Apple aren’t alone in experiencing pain at the high end. As I reported previously in the article "In Drive to the Bottom, a Winning Strategy for Nokia," the world’s third-largest maker of smartphones is also plateauing at the high end of the market and experiencing bigger unit-sales successes with low-end phones that are more acceptable to the budget conscious and in emerging markets. These cheap devices are particularly important in China, which will emerge as the world’s biggest smartphone market this year, edging out the United States, where high-end phones are more the norm.

Like Samsung and Apple, Nokia will continue with a mix of low-end and high-end products, and its recently released Lumia 1020—check out my review for more information—is one of the more impressive digital devices to ship in years. But don’t be surprised, when 2013 concludes, to discover that Nokia sold far more Lumia 520s and 625s than high-end phones. It’s just the way the market has evolved.