Why Smartphone Pre-orders are not a Good Barometer of Success in a Saturated Market

This week, two independent reports pointed to weak pre-order numbers for the new Samsung’s flagship models the Galaxy S9 and S9+.

First, a Korean publication called Yonhap News Agency reported a Samsung executive commenting that the preorders of the Galaxy S9 are similar or slightly lower to that of the Galaxy S8. He also reportedly blamed the dip in demand on the two-day gap between unveiling and pre-orders opening, compared to an eight-day delay for the Galaxy S8.

This first report was followed by a report by analyst Jeff Johnston of Arthur Wood Research. He said that  “the channel” that Galaxy S9 orders “are down ~50% over the Galaxy S8”.These pre-orders are “significantly underperforming pre-launch expectations of 10% to 15% growth,” he writes. Johnston deems it a reflection of people “upgrading a much slower pace as features are falling on deaf ears.” He writes that while this is not great for Samsung but it is worse for the industry as it suggests that smartphone sales are starting to decline at an accelerating rate.

While there is evidence that replacement cycles are slowing down in mature markets I am not sure I see the market quite in the same way as Jeff Johnston.

Let’s break it down:

  • The majority of buyers who jump onto pre-orders are highly loyal, highly engaged users who tend to update their device every year. Last year, in the US, around 22-25% of Samsung’s installed base had the previous year’s model (the Galaxy S7 and S7 Edge). This year around 15-18% of Samsung’s base owned last year’s model, the Galaxy S8, S8+ by the end of 4Q.
  • These numbers alone can explain why pre-orders volumes can be flat or slightly down compared to last year. This is based on the assumption that Samsung’s overall base has grown year over year but only marginally.
  • While the lower base of newer models can speak to replacement slowing down I am not sure I would say that the upgrade cycle slowdown is accelerating.
  • What is clear is that the real opportunity is in the much larger volume of users who have older devices. For those, the improvements delivered by the latest models are most likely both hardware related as well as UX related.
  • For the owners of last year’s model, the Galaxy S9 and S9 Plus might seem like a small increment which is why Samsung is clearly trying to incentivize last year’s upgrades with high trade-in value. This is a more attractive offer than bundling either another phone or another device as it makes the purchasing decision much easier plus it gives Samsung and carrier a phone they can refurbish and resell.
  • There is no doubt that for users of older models the improvement will be significant. The question, for these users, is really whether they will want to buy the latest model or invest at a lower price point of last year’s smartphone.
  • This dynamic will impact volumes as well as ASPs as we saw with Apple last quarter. Last year’s models helping the volume and the latest model increasing ASP.
  • From a market perspective, vendors will need to grow the proportion of their users who are on an annual upgrade program. Right now Apple has the most successful program with roughly 20% of its base in the US on it. For Samsung and Apple getting to 40% would guarantee a solid volume year over year.
  • Of course, hardware sales are also important to carriers and they could do something to incentivize annual upgrades. During the European Financial crisis of 2008, carriers were actually incentivizing users not to upgrade by giving them better tariffs or hard cash they could use towards their bills. This was when subsidies were still strong and the cost to the operators was adding up quickly. Carriers could now do the opposite giving incentives for upgrades not just in the price of the device but in the overall cost of ownership.
  • At Samsung’s disadvantage, there is also the fact that some Galaxy S8 and S8+ might be waiting for next year’s model which is meant to be Samsung’s real leap in hardware. The expectations for the 10 models are sure high.

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Carolina Milanesi

Carolina is a Principal Analyst at Creative Strategies, Inc, a market intelligence and strategy consulting firm based in Silicon Valley and recognized as one of the premier sources of quantitative and qualitative research and insights in tech. At Creative Strategies, Carolina focuses on consumer tech across the board. From hardware to services, she analyzes today to help predict and shape tomorrow. In her prior role as Chief of Research at Kantar Worldpanel ComTech, she drove thought leadership research by marrying her deep understanding of global market dynamics with the wealth of data coming from ComTech’s longitudinal studies on smartphones and tablets. Prior to her ComTech role, Carolina spent 14 years at Gartner, most recently as their Consumer Devices Research VP and Agenda Manager. In this role, she led the forecast and market share teams on smartphones, tablets, and PCs. She spent most of her time advising clients from VC firms, to technology providers, to traditional enterprise clients. Carolina is often quoted as an industry expert and commentator in publications such as The Financial Times, Bloomberg, The New York Times and The Wall Street Journal. She regularly appears on BBC, Bloomberg TV, Fox, NBC News and other networks. Her Twitter account was recently listed in the “101 accounts to follow to make Twitter more interesting” by Wired Italy.

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