Huawei’s New Smartphones, Samsung’s Q1 2016 Revenue Beat, What Apple Can Learn

Huawei came out of the gate swinging in 2016 with a new lineup of flagship devices designed specifically to start to move their brand into the premium tier. These new smartphones are loaded on paper and, interestingly, have a price tag to match. Huawei has made a run in many markets by being a player in the “affordable premium” segment. Meaning, great phone design and specs but priced more in the $399 to $499 range. These devices start at $599 Euros or nearly $700 USD. That’s a pretty pricey phone in a shrinking premium Android market. However, after building a business on extremely small margins, if these devices do even halfway well it could do wonders for their profit from this segment.

That said, they are moving into Samsung and Apple’s price range and while taking share from Samsung is possible, taking share from Apple is highly unlikely. We see in nearly every market consumers who are spending over $500 USD are buying iPhones. The last hard data point on this matter we had is over 80% of smartphones sold above $600 are iPhones. So Samsung and Huawei are fighting for 20% share of this price range.

Huawei’s brand is rising. They are taking every page out of Samsung’s 2012 and 2013 playbook. Only it isn’t 2012 or 2013 anymore and the market has changed dramatically. However, they are pushing the envelope in specs and optics. The new dual-camera solution is quite interesting and I look forward to trying it. Interestingly, in Androidland, one little feature like an advancement in cameras can get an Android user to go from one brand to another. But that same dynamic doesn’t work to get an iPhone owner to switch. To appeal to Apple’s customers, you need more than one great feature; you need many and a robust ecosystem. That is the challenge and why it is odd Huawei is targeting the price range they are. Especially since the largest market for this price range is the US and they don’t plan to enter with these devices until later in the year, when the iPhone 7 will be out.

Samsung’s Q1 Revenue Beat

We have been hearing about Samsung’s strong demand for the S7 (really the S7 Edge is the hot item) and this is the first time in a long time our data and sources confirm a renewed strength in the Galaxy line. Thanks to this dynamic, Samsung posted a solid beat which they announced in their Q1 2016 preliminary earnings. As the strength in higher-end Samsung phones goes, so does their component division which likely contributed the most to their earnings beat.

Sifting through our data, I don’t think the strength in Samsung’s S7 line had really much to do with the device itself. More likely their base was sitting on older devices and it was time to upgrade. Looking at specific Samsung models owned by consumers globally, only 8.5% of Samsung’s user base is on a Galaxy 6 line device, with the vast majority using S5, S4, and similar year Note devices. Basically, Samsung’s base largely skipped the Galaxy 6 line and the bulk of those on S5 and S4, Note 3 and 4 users are now upgrading. The other nugget is the S5 continued to sell well even during the S6 launches. Which explains why the S5 shows up so much in ownership data. Samsung’s repurchase rate is 63% according to our data. While that lower is than the 80% number of iPhone owners, it can be estimated a good chunk of their base will stay loyal. The basic point is the weakness of the 6 is leading to the strength of the 7 line as their base now seems to be upgrading.

Samsung is a hardware company. Some news outlets suggest the worst is behind them. However, any hardware company will have no choice but to ride the ebbs and flows of consumer upgrade cycles.

What Apple Can Learn

Interestingly, Apple can learn from some of these ebbs and flows in consumer hardware cycles, something they really haven’t had to worry too much about up to this point. A very interesting statistic came out of a report yesterday from Kantar on why the iPhone SE may do well in the US.

The move should, first and foremost, appease Appleā€™s user base, 58% of which still owns an iPhone 5s or older. The average lifecycle on these iPhones is 27.5 months, longer than the overall smartphone market at 20.9 months, suggesting that up until now these iPhone owners have been hesitant to upgrade. This is either because they prefer a more compact iPhone, or because they are not interested in investing in the new models.

The stat I put in bold is deeply insightful. There is a portion of the iPhone user base, which owns a specific type of model, who behaves differently than not just the smartphone market as a whole, but also other iPhone owners of different models. That last bit is my point, not Kantar’s. In retrospect, this makes a ton of sense. Apple has the unique position of selling a product, the iPhone, which spans the diffusion of innovations. Meaning everyone from leading-edge innovators to laggards on the spectrum has an iPhone. So it is reasonable that those in the late majority and laggards behave differently, both in terms of models they are interested in and their refresh cycles.

If we hold to this logic, then Apple should, with some degree of educated certainty, have a sense of their installed base by model and the refresh rates of those users. With a keen understanding their cycles are quite different; some are longer, some are shorter. We see this in our data when we look at upgrade plans for those who own a 5, 5s, or 5c in the US who have a much higher intent to upgrade every 3 years or longer where those who own a 6 line device tend to lean toward 24-month upgrades.

With what I just outlined between Samsung and Apple refresh cycles, it magnifies the challenges of selling to the mass market consumer in huge quantities as both Samsung and Apple both do. You get bit by the stubborn upgrade cycles of a huge portion of the market that simply doesn’t upgrade until absolutely necessary. This is why Apple needs to not only try to shift to installment plans to get on regular, more predictable cycles but also continue to evolve away from pure hardware and into services. Something I believe they understand and are building toward.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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