RIP $500 and Above Android Phones

Today, Samsung launched the Galaxy Note 5 and the Galaxy 6 + Edge. Neither device will change their declining fortunes in the smartphone landscape. What Samsung is up against is something many struggle to internalize. Most understand Samsung’s issues as being eaten alive from the middle price tier of Android. There is truth to this and I’ll address that. However, it is their losses in the high-end of the market most did not see coming and it is going to get worse as subsidies disappear in the US. I’d like to start by addressing this dynamic, then the change in premium Android pricing.

Change in US Subsidy Structure: The US market is largely a replacement market. The initial belief was the change in subsidy structure would hurt Apple because, once consumers could see the full price of the iPhone, they would choose a less expensive device. The fault in this thinking is a consumer was not going to go from an iPhone to a sub $200 Android handset. Furthermore, the structural shift to installment plans is the icing on the cake for Apple and the nail in the coffin for Samsung.

Carriers knew early on moving to installment plans would not hurt the premium tier. They also had a hunch it would help Apple, but it was just a hunch. US consumers like payment plans and they like putting things on credit. The massive amount of US consumer credit card debt is all you need to look at to understand this point. Nearly all research in this area shows US consumers have no problem paying a monthly fee to get something they otherwise could not afford to get it right now. I recognize the unhealthiness of this, but it is reality.

Let’s look at this through the lens of pricing. Take the cost of an iPhone or Samsung phone and divide it up over 12 or 24 months. You get an average of $25-$30 depending on the SKU. Now, let’s use some logic that says a competitor wants to undercut Apple on price to drive sales. Say Motorola wants to launch an amazingly competitively spec device to Apple and charge $350 for it. Their assumption is a device nearly half the cost of the iPhone will be attractive. And, yes, looking at a price of $350 vs. $649 or even $749 looks attractive. However, most consumers are not going to drop $350 right there to pay full price. Therefore, they will still likely utilize a payment plan to get this $350 Motorola phone. Take $350 and divide it up over $24 and you get $14. The consumer is now looking at $14 vs. $25 per month. Not quite the same differential as $300. What is happening is many consumers opt to get the device they want to begin with when looking at the monthly plan dynamics over the full price of the device.

Samsung seems to be using some of this logic, without realizing the real math, by offering the Note Edge 6 + for more than the Note 5 and the iPhone. The problem is a few dollars isn’t going to make any difference and one can argue they hurt themselves by not being on par with the Note 5 or 6 Plus price-wise. While Samsung has certainly benefitted from payment plans, this may all be about to change. Android OEMs who want into this country understand this dynamic. What is still being settled, in their mind, is what the true price differential needs to be to entice a consumer to buy the phone outright and not opt for a payment plan. Let’s say an Android OEM offers roughly the same specs as a premium Samsung phone but for a price of $250. Would that do it? Maybe $199? Somewhere in that range could make a difference and, believe it or not, there are a few handset companies out there who can make money in those prices ranges. As the costs of components come down as well, we could see premium Android devices get under $199. This would make life miserable for Samsung and I believe things are heading in this direction for Android in the US over the next few years.

All the while, the change in the subsidy structure and the move to installment plans could be the driver that puts Apple over 50% market share in the US. I have even had folks at carriers tell me 60% is not out of the question for Apple. Lastly, a data point. From my sell-through tracking model, Apple captured 85% of the sales of smartphones costing more than $600 in Q2 2015. (Yes somebody on the earnings call suggested 90%, but my data suggests 85%. Either way it is high.)

Overall, premium Android is shifting. Look at devices like the OnePlus or Xiaomi’s phones or Micromax in India. All over the world, extremely competitive phones, specification-wise, are popping up in the $300 range and defining the new Android premium price and spec range. Even in this country, a brand like Alcatel sees growth signs from this strategy with the Idol 3 — an incredible phone for $250. I actually use this device as my primary Android tester phone.

These devices are changing the shape of Android premium phones and, remarkably, there is still a roadmap to keep specs high and drive the price even lower. R.I.P. $500 and above Android phones.

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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

11 thoughts on “RIP $500 and Above Android Phones”

  1. Competing with Apple on price is like competing with Vuitton or Lululemon on price: mostly irrelevant. Nobody buys those for price -on the contrary, many buy those *because* they’re expensive thus exclusive-, even specs/features are secondary to looks.
    Sure, most of the market for bags/garments/phones is non-luxury, but I don’t think people go back and forth between luxury and sensible that much, especially for phones: you buy only one, there’s no market for spare “comfort/active” handsets.
    Samsung are going after Apple in that luxury segment, trying to get some cachet and an overwhelming specs/functionality advantage. They seem to be somewhat successful: they managed to create nice (metal/glass ! just don’t drop them) and distinctive (Note, Edge and Active) designs and outclass iPhones on specs, price above iPhones, and move quite a bit of product. They’ve been vastly more successful than HTC who followed the same game plan.
    What’s surprising is they did that by re-purposing their spec-oriented line, and left their historical non-luxury but high-end customers high and dry. The Note line has gone from 600€ to 1,000€ (128Go, incl tax), they’ve lost me and, looking at the Android forums/review comments, a lot of past customers (mostly to the LG G4). That’s all the more weird since a while back, they seemed to be introducing the Alpha/A line as the design-oriented line, but then switched to evolving the S line.

    Anyway, other OEMs also seem to be using one handy way to position their product: materials. the premium for glass and metal is going up and usually linked to other limitations (removable battery and SD slot). LG and Moto are trying to innovate (with leather and custom casings) and walk the fine line between value and luxury.

    1. Specs became irrelevant years ago. What sells phones are design, build quality and most of all – Apps. Samsung had some success by advertising to the nth degree for most of their phone line. It was successful also to a degree in the luxury market, because Apple didn’t have a big phone. Apple does now and no one has any need for a big Samsung. In fact they probably wanted a big iPhone all along.

      At the bargain end of the market, the Moto line is very good, but if you are going to spend iPhone money, you are most likely to buy an iPhone.

      1. That’s partly arguable: design certainly counts for a lot. Build quality is a weird word to use to refer to very counter-productive materials… I think shininess would be more apt: plastic phones are more durable than glass ones, and work better than metal ones.
        As for specs, they still do matter tangentially: photo quality, battery life, reactivity, and for gamers FPS. I think Samsung are trying to work that angle, adding creature comforts such as wireless charging (one of the 2 things I miss on all devices since my Touchpad, the other being AMOLED, since my Note v1, and which Samsung also has).
        As for “no one has any need for a big Samsung phone”, the S6 family is still selling rather well, at iPhone prices… so maybe specs still do matter to some, now that Samsung equalized on shininess ?

        1. Don’t confuse specs with performance. They are very different things. IME plastic phones do not work well at all. I wouldn’t do FPS on my phone. AMOLED has had its day and it wasn’t a very good one. Samsung phones are going to fade away, most notably at the top end, but the bottom end could fade even quicker.

        2. have you read Samsungs last quater earnings report and the transcripts of the call afterwards? They specifically state the S6 is not selling well and they are going to adjust pricing to boost sales. Plus they announced drops in profits, margins and revenue.

          I fail to understand why you make several posts stating how Samsung is doing great in smart phone sales when all the facts ( which are public ally available) say otherwise.

          1. Samsung had lofty goals for the GS6, it *is* selling quite well in the absolute, and Samsung Mobile is making a lot of money… just not as much as they want to. Samsung is slightly down (8-4%, hardly a catastrophe), they wanted to be up. The GS6 is selling fine, is the best-selling Android flagship… (and I won’t be getting one ^^)
            Samsung also say they had supply issues with the Edge, which proved more popular than they anticipated, even though it has little extra functionality and costs €100 more, which does say something about the market thirst for good looking gizmos.
            Also, I’m saying they’re doing well (which making billions selling phone justifies ?), not that they’re doing tremendous, they certainly have issues.

          2. https://finance.yahoo.com/echarts?s=005930.KS+Interactive#{“range”:”2y”,”allowChartStacking”:true}

            This is Samsung’s Chart. It topped at 1,500,000 Korean Wons on Mar 18, 2015. It is now at $1,100,000 Korean Wons. Samsung is continuing to lose altitude in a straight line and most of the cause rests in phones.

            That’s near a 28% drop in 150 days.

            Some phone success, they’re having!

          3. They just announced during their earning calls that they would adjust the pricing on the S6 and S6 Edge, due to severe market pressure. How is that selling well?. Have you ever heard of a company announcing they will be cutting prices on products that are selling quite well? The only reasons the entire Samsung Electronics division didn’t tank even more is because the Semiconductor division is now the main profit centre unlike the mobile unit which used to be 78% of profits. The S6 and S6 Edge are being slaughtered. I however agree they had seriously lofty goals. I will be impressed if they sold up to 20 million. 70 million was a bad joke, seriously 70million?

    2. Specs are for a purpose. Higher numbers don’t mean better. Samsung has had no success going after Apple, hence the announced drop in profits, announced drop in margins and announced plans to drop the prices of the S6 and S6 edge

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