Analysts: Samsung's high costs for Galaxy Note 5, S6 Edge+ could turn off consumers

Samsung Electronics' newest phablet smartphones, the Galaxy Note 5 and Galaxy S6 Edge+, got a major media unveiling yesterday and carriers fell over themselves to offer promotions to entice customers to buy them. However, Samsung's biggest challenge may be that there are more smartphones, including phablets, coming out from rivals that offer similar specifications for much less money.   

While prices vary from carrier to carrier, the 32 GB Note 5 costs around $700 when paid off over 24 months or paid for full retail price. The 32 GB S6 Edge+ costs around $800. Samsung may not be able to justify those high costs, analysts say, especially when carriers are moving away from subsidized smartphones and consumers are seeing more and more lower-cost alternatives.

For example, Motorola Mobility's Moto X Pure Edition is an unlocked phone with a 5.7-inch screen and 21-megapixel camera and it can work on any of the four Tier 1 carriers as long as customers swap out SIM cards. That phone will sell for $400.

ZTE's Axon Pro boasts specs that are nearly identical to the new Galaxy phones: The Axon is powered by an octa-core 2 GHz Qualcomm (NASDAQ:QCOM) Snapdragon 810 processor, 4 GB of system memory and 3,000mAh battery with Qualcomm's QuickCharge technology for fast recharging. It costs $450.

Xiaomi, while it does not sell phones in the U.S. market, also undercuts Samsung on price. Its 5.7-inch Mi Note boasts similar if slightly less high-end specs to the new Galaxy phones but it costs roughly $270. The firm's new 5.5-inch Redmi 2 phone costs $125.

"Unless it comes in at or below the iPhone 6 Plus it's dead in the water and my guess is that if they want to sell anything like the same number that they've sold in prior years the price is going to have to go way down," Jackdaw Research analyst Jan Dawson told Re/code ahead of the announcement.

"If Samsung cannot provide meaningful differentiation in hardware even at higher prices, then lowering prices will mean entering a straightforward price war," Current Analysis analyst Avi Greengart told CNET.

Samsung says it is not concerned with the competition. "We're very comfortable with how we've differentiated in the market," Justin Denison, head of product strategy and marketing for Samsung's U.S. business, told CNET. "Our Galaxy promise is the latest and greatest technology."

The same pressures being brought to bear on Samsung are also affecting other Android OEMs, as Chinese rivals like Huawei and Xiaomi have cut into the sales and profits of LG Electronics, HTC, Sony and even fellow Chinese firm Lenovo.

"The data is showing that unless there is a brand pull (and only Apple is in this category), the device game has become a price game," industry analyst Chetan Sharma told Re/code. "This is especially true on the high end. Given that some good devices are available at half the price makes it hard for Samsung, LG, Sony and similar players to be successful with a device on the high end."

To counter a price war on hardware and set its products apart, Samsung has been investing in U.S.-based startups through its Global Innovation Center in Silicon Valley. Samsung has invested in and acquired companies like SmartThings for an Internet of Things software platform, LoopPay to power its Samsung Pay mobile payments efforts and Pixie to add social media interaction feeds to its smart TV software.  

"Samsung is a company with over $200 billion in revenue, mostly driven out of selling hardware and components," Won Jin Lee, an executive vice president within the visual display division who worked closely with Pixie to add its technology to Samsung's TV, told The Verge. "But the definition of future technology does not stop at hardware. We are now living in a world where, in order to deliver the right consumer experience, we need a combination of the right hardware, the right services and the right content."

For more:
- see this CNET article
- see this Re/code article
- see this The Verge article

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