Diverging Fortunes: High Prices Propel Apple, Sink Samsung


Apple appeared to gain market share from Samsung during the second quarter, with iPhone share rising to 12% from 11% from a year ago as Samsung dipped to 20% from 22%.

Apple appeared to gain market share from Samsung during the second quarter, with iPhone share rising to 12% from 11% from a year ago as Samsung dipped to 20% from 22%.


Photo:

Richard Drew/Associated Press

Apple
Inc.


AAPL 5.89%

and

Samsung Electronics
Co.

entered the second decade of the smartphone era by betting on super-high prices for their flagship products. One year in, that strategy has energized Apple but sapped Samsung’s sales.

The Silicon Valley company on Tuesday announced a third consecutive quarter of record iPhone revenue as strong demand for its $999 iPhone X helped lift the average iPhone selling price 20% to $724 for the three months ended in June.

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Just a day earlier, Samsung announced its smartphone profits cratered, as fewer buyers were willing to shell out the nearly $1,000 that the South Korean company wanted for its flagship Galaxy S9 handset. On average its smartphones sold for about $220 in the most recent quarter, analysts said, brought down by the lower-cost models it sells alongside its pricier iPhone competitors. 

The results illustrate the diverging fortunes of the world’s most profitable smartphone companies as they sweat out an industry contraction, with fewer buyers eager for the latest gadget.

Apple has navigated the slowing market by leaning on its premium brand, new features and exclusive operating system to command record prices—even with little unit growth, analysts say. But Samsung’s higher prices didn’t deliver, as flagship Galaxy S9 sales slipped and unimpressed consumers turned to less expensive devices from Android rivals.

Adding insult to injury, Apple appeared to gain market share from Samsung, said Neil Mawston, an analyst with Strategy Analytics. During the second quarter, the iPhone’s share rose to 12.1% from 11.8% a year earlier and Samsung slipped to 20.9% from 22.9%, according to International Data Corp. Meanwhile, China’s Huawei Technologies Co. for the first time surpassed Apple as the world’s second-largest smartphone maker, with 15.8% of the second-quarter market, IDC said.

“Apple got people to upgrade in a way no one has done before, moving them up the price curve with a design that was radically different from its predecessor,” said Patrick Moorhead, president of the technology firm Moor Insights & Strategy. “Samsung just hasn’t been as effective.”

Shares of Apple rose 5.9% Wednesday to $201.50 and earlier hit an all-time of $201.76. The stock is up 19% in 2018. Samsung shares, which rose slightly Wednesday, are off 8.7% this year.

Apple and Samsung jacked up prices last year for their most advanced phones, as people began holding on to their devices longer and as fewer new high-end buyers came into the market. The smartphone market is largely saturated, especially in the U.S. where there is nearly one smartphone for every person, according to IHS Markit, a research firm.

With the iPhone X, introduced last September, Apple sought to create a superpremium product. It justified that price by adding features like facial recognition and its first organic light-emitting diode, or OLED, display. The features suggested to customers that they would get some extra utility out of the latest device, analysts said.

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Priced Up

Apple has increased its average smartphone selling prices with the $999 iPhone X, even as its share of high-end handsets has declined.

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Apple average selling price, change from year earlier

+15.02%

with Q4 projection*

20%

15

10

5

0

–5

’14

’17

’16

FY2013

’18

’15

Market share of phones priced above $400

Other

Huawei

Samsung

Apple

100%

80

60

40

20

0

’18

’17

’16

’19

2015

’20

FORECAST

*Analyst forecast according to FactSet
Note: Apple fiscal year ends in September.

Sources: the company (average selling price);
IHS Markit (share)

Apple has a long record of charging more for its products, and the company’s consistent presence among the most highly rated brands world-wide has helped justify those prices. However, its biggest advantage has been its role as the only seller of devices featuring its iOS operating system.

The iOS monopoly means users who switch to a rival device would have to learn a new system and potentially give up some stored information, analysts say. Those deterrents help the company retain some 92% of iPhone owners who upgrade to new devices compared with Samsung’s retention rate of 77%, according to Morgan Stanley.

During a call with analysts Tuesday, Apple Chief Executive

Tim Cook

said the success of the iPhone X validated the company’s pricing strategy. “We priced it at a level that represented the value of it, and we could not be happier that it has been the top-selling iPhone since the launch,” Mr. Cook said.

Samsung sounded a different note with analysts, saying its next handset, the Galaxy Note 9, would be offered at “reasonable prices.” Though the company beat Apple to market with a larger phone display in 2011 and added an edge-to-edge screen to its devices in 2017, its Galaxy S9 looked similar to its predecessor, the S8, and offered similar features, causing some consumers to question upgrading, analysts say.

The South Korea tech giant also doesn’t use an in-house operating system, instead relying on Google’s Android—which runs more than 80% of the world’s smartphones. That has made Samsung susceptible to stiffer competition from Android rivals.

Samsung has vowed to fight back by pushing future breakthroughs, such as new phone designs and handsets equipped for fifth generation, or 5G, wireless networks. The Wall Street Journal reported last month that weak Galaxy S9 sales have driven the company to work on introducing a foldable-screen phone by early next year

That phone won’t drive volume, “but it’s definitely a brand driver and that’s what Samsung needs,” Mr. Moorhead said.

Though Apple has proved more successful than Samsung at raising prices, analysts say continued success hinges on the iPhone maker’s ability to entice consumers with new features. They expect Apple to launch three new handsets this September: an update to the iPhone X; a plus-size iPhone X; and a new 6.1” LCD device that features facial recognition.

Apple, though, risks jeopardizing future sales if it keeps boosting prices, causing consumers to hold on to their iPhones. That “may bite them in the butt down the line,” said Wayne Lam, a smartphone analyst at IHS Markit.

Write to Tripp Mickle at Tripp.Mickle@wsj.com

Appeared in the August 2, 2018, print edition as ‘Apple Succeeds Where Samsung Doesn’t.’

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