Earlier today Patently Apple posted a report titled "Samsung Reports that Profits Rebounded last Quarter yet with Questionable Galaxy S7 Results." As the day has gone on, I'm surprised at how Samsung could hold a meeting about a positive quarter without actually providing solid numbers that would definitively spell out the so-called success of their Galaxy S7. How will Samsung explain away their 2-for-1 sales in the US as not sales but rather volume? How can they claim to have sold two times that of their previous S6 model if almost half were really promotional giveaways? No one at Samsung dared to mention that little factoid today when talking to the press and the Korean press never asked the question. A massive 2-for-1 sale is just steep price cutting, which brings us to our second Samsung story of the day that stems from a new Wall Street Journal report.
Samsung's massive 2-for-1 sale in the US right out of the gate for their new flagship S7 was a sign of desperation no matter how you try to justify it. Samsung's S5 and S6 were duds and Samsung had to make it like the S7 broke the mold and that they were back in the game. But it's based on tricky volume rather than real honest sales. If you think this is by accident or perhaps something this site is dreaming up, think again.
The Wall Street Journal makes it clear that Samsung lost its number one status in China, India and other countries last year until this day. How are they dealing with that? Massive price cuts. In the US it was in the hidden form of a 2-for-1 sale. Yet in India, it's just in-your-face aggressive price cutting.
The WSJ report states that "Samsung Electronics Co., after being dethroned in 2014 and 2015 as the No. 1 smartphone brand in China, India and Indonesia, is winning back consumers in these key markets with a simple policy: slashing prices.
Samsung's flagship high-end phones cost more than $600 but in the past year, it has been adding high-end features to its low and mid-tier phones that cost between $100 and $300.
Analysts warn that price cuts will hit Samsung's margins and isn't a long-term solution to turn around its ailing smartphone business, which saw its operating profit plummet 60% in the fourth quarter of last year to 2.23 trillion won ($1.85 billion) from two years earlier.
The WSJ notes that even if Samsung was able to sell slightly more S7's than last year's model, "profit would only be modestly higher than a year earlier, and 22% off from the first three months of 2014."
The report further noted that "Even if Samsung finds success in boosting its emerging-market share, it will put more pressure on its profit margins, which remain suppressed roughly at or below 10%, despite pledges from executives over the past year that the company would be able to nudge its margins back consistently into the double-digit percentage points. Analysts estimate Apple's gross margin at roughly 40%." Yet there's really nothing to estimate, Apple reported gross margin was 40.1% compared to 39.9% in the prior quarter.
Xiaomi's president, Bin Lin told the WSJ that he wasn't worried about Samsung's new pricing as its high cost structure means it can only compete on price by erasing its profit which isn't a sustainable long-term strategy.
The risk for Samsung is that its price cuts could erode its premium brand, said Patrick Moorhead, principal analyst at Moor Insights & Strategy. "If they continue to discount the Samsung brand, they will need to keep selling at a discount to Apple and that hurts them greatly in the future," he said.
In the end, many have argued with us that Samsung offering US-wide 2-for-1 sales for their new premium flagship S7 was no big deal. Yet that's simply myopic thinking and missing the larger negative trend. It's a desperate move in an effort to slow their decent into the abyss of irrelevancy.
Many analysts are warning Samsung that price cutting is going to hurt their brand longer term and yet Samsung's new mobile manager just wants to show the world results under his leadership, even if they're based on crushed profit margins; even if it's angering shareholders. What a lousy way for Samsung to start the year.
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