Samsung's Galaxy S6, HTC's One M9 show that flagship phones have peaked in importance

Phil Goldstein

I've been to numerous launch events for flagship smartphones over the years: the G1, the Palm Pre, Verizon Wireless' (NYSE: VZ) launch of the iPhone, the Samsung Galaxy S4 extravaganza at Radio City Music Hall, the LG G3 and more. Yet in mid-2015, eight years after the first iPhone was released, flagship smartphone launches do not have the luster they once did. They not only do not seem to move the needle for most OEMs' sales figures as they did in the past, but they also seem to matter less to handset makers' overall strategies.

Many smartphone vendors do not make money, and increasingly have been turning to what they hope are higher-margin services and non-smartphone devices to diversify their product portfolios in the face of thinning margins in the smartphone market.  

Flagship smartphones are still important, but not nearly as important as they once were, and they may never regain their aura of significance in the wireless market. That's not a terrible thing for the industry or for consumers, but it should force OEMs to rethink their overall strategy.

A key reason flagship smartphones do not matter as much as they once did is the gap between flagship phones and everything else in the market is narrowing. Flagship phones are supposed to be the pinnacle of design, specifications and services--and as such, OEMs often price them as the most expensive phones in their portfolios. Yet while phones like the Samsung Galaxy S6, LG G4 and HTC One M9 do have impressive designs and specs, how much difference is there between them and the forthcoming OnePlus 2? Although the phone won't be unveiled until July 27, we know a lot about it. The OnePlus 2 will sport a Qualcomm (NASDAQ:QCOM) Snapdragon 810 processor, 4 GB of RAM, a 3,300mAh battery and 13-megapixel back camera, and it will cost under $450. Those specs are more than comparable to "higher-end" flagship Android phones that cost $200 more.

As innovation has flattened out the industry, and as "lower-end" phones have achieved comparable specs and designs to premium flagship phones, many consumers have opted to go with the comparable but less expensive option. Witness the Motorola Moto G, a mid-level phone designed to appeal to budget-conscious consumers not just in developed markets but emerging ones as well. While the high-end Moto X may technically be Motorola's flagship phone, in 2014 the Moto G became the company's best-selling smartphone ever.

The performance of recent flagship phones is also a reflection of the fact that the iterative nature of smartphone design is not sparking consumer enthusiasm. HTC was criticized for not differentiating the One M9 from its 2014 predecessor, the One M8. The M9 went on sale in April and earlier this month HTC reported that its second-quarter revenue fell by 49 percent year-over-year and that it expects to post an operating loss of $165 million. Samsung, still the top smartphone vendor in the world, is finding out that even when it redesigns its flagship smartphones (and gets praised for doing so), that doesn't necessarily translate into spectacular sales. According to data from Argus Insights, in the U.S. at least, enthusiasm for the Galaxy S6 and S6 Edge waned quickly after the phones launched in April. Argus is "seeing a lot of upgrade fatigue," John Feland, Argus's CEO and founder, told me.

Handset makers that have established flagship smartphone brands feel compelled to churn out new versions every year as a corporate imperative, seemingly the way Marvel must keep filling movie screens every spring and summer with new adventures for its characters. Yet many consumers seem to be resisting the urge to upgrade, content with last year's model (or the one from the year before that) and reluctant to plunk down hundreds of dollars for a new phone that is only modestly better in terms of processing power, screen quality and battery life than the one they got 12 or 14 months ago.

Part of that, in the U.S. at least, can be explained by equipment installment plans, which at once incentivize early upgrades, but also delay upgrades as customers hold onto devices they have shelled out more for than they would for a subsidized phone, in exchange for reduced service pricing. I think a bigger factor is that the upgrades OEMs make to flagship phones from year to year are not wowing consumers the way they once did because the upgrades themselves are evolutionary and not revolutionary.

Apple (NASDAQ: AAPL) has been extraordinarily resilient to this trend, typically growing faster than the overall market. Yet its iPhone sales for the last quarter came in slightly below analysts' expectations.  

Moreover, Apple is also diversifying its product portfolio and service offerings. It is focused on the Apple Watch as its next growth driver, jumped into offering a streaming music service and is developing its own bespoke news content feed with Apple News. HTC is trying to get into wearables, especially for fitness. Microsoft (NASDAQ: MSFT), struggling to sell Windows smartphones, is working to get its software, apps and cloud services on as many mobile devices as possible. Chinese smartphone maker Xiaomi's MiUI software layer ties together all of its products--including TVs, Internet routers and air and water purifiers.

There is clearly still a market for flagship smartphones. They excite fans of the brands that make them, and often serve as the reference point for the company's design language that filters down to mid-range and lower-end phones.

But the days of the flagship smartphone as the be-all, end-all product for smartphone companies are over. They need to be thinking about how to bring features that were reserved for flagships to mass-market phones. They need to think beyond smartphones for other growth opportunities as average selling prices continue to drop and margins fall further. Flagships are important; they are the leaders for navies and for companies--but the point of a flagship is that it leads an entire fleet.--Phil

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