Samsung’s Galaxy S5 range is not performing as well as the Galaxy S4 year-on-year. Counterpoint’s recent survey on sales of the South Korean company’s flagship Android handset shows sales on the order of 5 million units during May, the first full month of retail sales. That’s two million units less than the Galaxy S4 at a similar point in that handset’s product cycle, but more importantly it’s two million units less than the iPhone 5S sold during May, a full eight months after the release of Apple’s leading handset.
Following on from the drop in smartphone revenue and income detailed in Samsung’s Q2 2014 results, this news shows the increased pressure that the smartphone manufacturer is coming under. The core of Samsung’s current strategy is to have a desirable high-end flagship device that is perceived as the best handset of the day in terms of technology and specification. The halo effect from sales, reviews, and marketing around the leading Galaxy device then trickles down through the rest of Samsung’s portfolio, allowing for volume sales in the mid and low-end markets.
Samsung’s smartphone sales are dropping. The company is under competitive pressure in Europe, which operates with lower subsidies when compared to the US market which puts more pressure on the mid-range device to perform well in the retail market; advertising is not delivering as strong a return as it has in previous years; and the average handset selling price is going down.
The South Korean company’s portfolio is being squeezed at the bottom. The profit per handset at this level is far less than of the flagships, but in theory you can make it up on the volume of sales. Samsung needs to sell more handsets at the lower price points. That needs the Galaxy S5 halo effect to work… and it’s not. The Galaxy S5 did not have the groundswell of critical adulation that this strategy demands. Lower sales of the S5, which has a far higher profit margin, also weakens the overall strategy.
The questions, what happens next? Talking to Reuters, a Samsung spokesperson said “We will strengthen our product competitiveness by reinforcing our premium brand reputation, powerful product line-up, and cutting-edge technology.”
What are Samsung’s options then?
The first would be bringing in a price drop to boost sales. Short term that would likely work, consumers expect to see handset prices drop through the life of a device, but Samsung is at the start of what is a yearly cycle of handset refreshes. Dropping prices this early in the run may boost sales over the next few months, but it weakens the ability to feet a high starting price next year as the new cycle starts. It’s incredibly short-term, and does nothing to promote long-term success, so I would take this off the table.
Samsung could look to kickstart the Galaxy brand name with an updated S5 in October for the Christmas market (think of it like a Galaxy S5s). Depending on what is ready in the research labs, this has potential, but where are the major gains in technology and marketing to be found at short notice? Samsung already has a line of smartwatches and wearables, the addition of health tracking on the handset was a big part of the original S5 story, and it’s tough to iterate on form factor when you have a handset at every conceivable size.
You’re also not talking about one product line, but many. All the smartphones at each price point, the range of tablets, phablets, and feature phones are all tied in to the yearly cycle. Changing now would be a massive disruption for a hastily conceived goal.
The likely option is to ride out this product cycle and make a huge play in new technology for the next cycle, presumably debuting at Mobile World Congress 2015. That’s the ‘keep doing what we’re doing to change’ plan, and the obvious benefactor of this approach would be Tizen.
The Samsung Tizen Z is due for release later this year. A limited release on this handset could herald a whole family of devices ready to be announced at MWC, with availability in April and May next year. Rather than another small updated to Android, Samsung would be making a radical departure which could reenergize the entire company… new handsets and technology to attract the geekerati of the world and start a buzz around the smartphone manufacturer again; a new brand name and family identifier for the marketing team to work with; and the perception of ‘new’ that would surround the Tizen name in the consumer market.
It’s also a ‘bet the farm‘ option, because it would involve the company putting retail distance between themselves and Android (at least at the high end). Do customers buy a Samsung handset because of ‘Galaxy’ or because of ‘Android’? I’m sure Samsung believes it is the former, even as sales are slowing and there is a diminishing return in mining the Galaxy name.
Standing up in 2015 and announcing the Galaxy S6 feels like a non-starter of a plan. Samsung has been working to put in place the building blocks of their own platform over the last few years. The best time to pull the Tizen trigger would be as the Galaxy name was peaking. Now the Android brand name is on the slow downhill part of the trajectory, and Samsung needs to have the confidence to send Tizen into the world, all guns blazing, before the Galaxy family falls off a cliff.
(Taken from Forbes.com)