How do mobile device manufactures continue to eke out revenue from a saturated handset market, where there is close to one smartphone for every person in the U.S.? The smartphone market has matured, lengthening the new purchase cycle for existing users. This reality has forced manufactures like Apple (AAPL, Financial) and Samsung (XKRX:005930, Financial)(SSNLF, Financial) to produce products that offer sufficiently novel features to justify trading up to a newer, more expensive model.
Despite reporting robust, higher-than-anticipated earnings and diversification into services, Apple still gets 56 % of its total revenue from iPhone sales. The single-product dilemma forced the tech giant to adopt new strategies to maintain operating margins and maintain a stable revenue stream from its most popular and profitable device.
Both Apple and Samsung adopted similar strategies for sales in the 20-year-old contracting smartphone market by placing their bets on sky-high prices for their flagship products.
In order to generate revenue from its most profitable product currently, Apple decided it would try and entice users to upgrade by introducing a radically new phone design at an unheard of price of $1,000, slightly below the price of many laptop computers. There was a risk to the strategy, but the company’s new iPhone X attracted a surprising number of buyers.
Apple reported its third consecutive quarter of record iPhone sales as demand for its $1,000 device increased the average selling price by 20% to $724 for the three months ending in June.
Apple managed to successfully move consumers up the price curve, no small feat, by producing a new product that was radically different in design than previous models.
Apple introduced imaginative features like facial recognition as well as a light-emitting diode, or OLED, display and, of course, a larger screen. The new features suggested to customers that they would gain extra utility out of the latest device as well as a more fluid user experience, which would make it more pleasant and easier to use. The design changes were sufficiently substantial that consumers were willing to pay up
Samsung’s fortunes with its foray into the high-end market were quite different. It reported that profits from its new $1,000 Galaxy S9 tanked. The company met resistance. Many customers balked at paying premium prices as Samsung’s new high-priced offering failed to impress, presenting consumers no compelling reasons for upgrading; the $1,000 model looked the same as the older S8 and offered similar features, insufficient for most customers to justify the steep cost for the upgrade.
The average price of Samsung’s smartphone is $220. The difference with Apple in average pricing is appreciable.
According to International Data Corp., Apple gained market share from Samsung. During the second quarter, iPhone sales increased to 12%, up from 11.8% the previous year, while Samsung's ranking slipped to 20.9% from 22.9%.
Apple products have always commanded a premium price and their devices have consistently been one of the highest-rated brands that justify an above-average price. Their product designs have always been groundbreaking. Apple has been enormously successful by wedding its hardware products to its superior operating system in a manner that provides users with enhanced utility and ease of use.
Due to this congruence, Apple customers have demonstrated an affinity for the company’s products, even though they often are considerably more expensive than the competition.
Apple transferred this design and production philosophy to the iPhone, which gives it a distinct advantage over its rivals by providing users with a seamless experience in the software-hardware ecosystem.
No other company has been able to replicate the success of integrating consumers phones, calendars and music needs into one convenient and user-friendly device. This distinct competitive advantage gives Apple an unexampled 92% retention rate.
This is a distinct disadvantage for Samsung and other smartphone manufactures, as the Android system and the Samsung hardware are separate and distinct. Trying to persuade existing iPhone users to switch is a difficult sell because they would have to upend their existing computing habits and learn an entirely new operating system with all its quirks and changes.
For many consumers, the learning curve for moving over is simply too high and they can’t risk changing if they find the Android system not to their liking. If they find the experience unsatisfying, they are out the price of the Samsung device
Apple is planning to introduce additional iPhones that it hopes will drive a stronger replacement cycle and maintain its stellar average device price. Its new models will vary from the iPhone X, with some capturing its more prominent features, but with lower-cost OLED screens. Other lower-priced models with carry LCD screens.
Apple’s iOS operating system is continually upgraded with the goal of making the most efficient and user-friendly system even better. The company plans to introduce its latest iteration of the operating system, iOS 12, in the fall.
Disclosure: I have no positions in any of the securities referenced in this article.
