Why Samsung should be nervous about its premium Galaxy smartphones

With so many premium smartphones coming in at an affordable price, can Samsung continue to justify its higher prices?

Roger Cheng Former Executive Editor / Head of News
Roger Cheng (he/him/his) was the executive editor in charge of CNET News, managing everything from daily breaking news to in-depth investigative packages. Prior to this, he was on the telecommunications beat and wrote for Dow Jones Newswires and The Wall Street Journal for nearly a decade and got his start writing and laying out pages at a local paper in Southern California. He's a devoted Trojan alum and thinks sleep is the perfect -- if unattainable -- hobby for a parent.
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Roger Cheng
6 min read
Will people still pay for the pricey Galaxy Note 5 if other cheaper alternatives pop up? Sarah Tew / CBS Interactive

When it comes to premium smartphones, a brave new world is coming -- and it's unclear where Samsung Electronics fits in it.

The change is coming slowly, but surely. You're starting to see it with the emergence of smartphones like Motorola's Moto X Style , ZTE's Axon Pro or the Xiaomi Mi Note -- so-called flagship products with one shared key trait: a price tag that is far more reasonable than your standard high-end fare.

The Moto X Style (known as the Pure Edition in the US) will sell for $399, the Axon Pro costs $$449, while the Mi Note costs roughly $270.

In comparison, Samsung, the world's largest smartphone maker, on Thursday unveiled its latest jumbo device, the Galaxy Note 5 , as well as the Galaxy S6 Edge Plus , a larger version of its S6 Edge, which stood out from the crowd with a display that wrapped around the sides of the phone. While pricing varies between carriers, the Note 5 will cost around $700 and the S6 Edge Plus will cost roughly $800.

Samsung, as well as other premium players such as HTC and LG, increasingly find themselves hitting a wall as consumer expectations shift for how much a high-end smartphone should cost. This is particularly true for smartphones running Google's Android mobile software. It's also part of a broader slowdown in smartphone sales and a general lack of excitement for a new generation of phones that are better -- but only marginally so.

"Phone fatigue is a real thing," said Tom Moss, chief executive of Nextbit, a startup attempting to shake up the market with its own smartphone.

While Samsung boasts an impressive -- some would say overwhelming -- portfolio of smartphones at various prices, the company counts on its flagship Galaxy S and Galaxy Note franchises to drive awareness, sales and profit. A change in how much a person is willing to spend on a smartphone could force the company to work harder to justify its higher prices. The company has already indicated it would drop the price on its Galaxy S6 smartphone, which was unveiled in March.

The Galaxy Note 5 is the latest iteration of its jumbo smartphone, known in the industry as a phablet. Sarah Tew / CBS Interactive

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

Samsung isn't concerned.

"We're very comfortable with how we've differentiated in the market," said Justin Denison, head of product strategy and marketing for Samsung's US business. "Our Galaxy promise is the latest and greatest technology."

Indeed, the S6 Edge and its larger S6 Edge Plus brother are still impressive to hold, and the company essentially created the market for supersized smartphones, known in the industry as phablets because they blur the line between phone and tablet. The company has also spent billions of dollars to build up its name recognition.

But the fact that smartphone prices don't have to be ridiculously high is a revelation that has rapidly begun to dawn on consumers around the world. In the US, the wireless carriers are shifting the burden of smartphone payments on to the consumer. Last week, Verizon opted to end service contracts and subsidies that kept the price of smartphones artificially low. That iPhone 6 that was previously $199 with a two-year contract actually costs $650 -- often paid over 24 months.

So what happens if people start to think Samsung's phones are too pricey?

Watch this: Reasons not to buy the Galaxy S6

Blame China

If the smartphone pricing revolution has an origin, it would be China. Companies such as Huawei, Lenovo (which own Motorola) and ZTE are among the Chinese vendors looking to build a reputation for creating high-quality smartphones at affordable prices.

But the standard bearer for this shift is a company that doesn't sell smartphones in the US: Xiaomi. The Chinese company is one of the most valuable startups in the world and already boasts a healthy fan base in China, Southeast Asia and India. When Xiaomi held an event in Sao Paolo, Brazil, to announce its launch there, the company had little trouble filling a 1,000-person capacity theater with enthusiasts. The company held a second session shortly after to accommodate the hundreds of people who couldn't make it into the first event.

The Mi Note is a healthy competitor to other premium smartphones in key markets like China. Aloysius Low/CNET

"It's one of the craziest days of my life," Hugo Barra, head of Xiaomi's international business, said in an interview shortly after the launch in June.

On Thursday, Xiaomi unveiled its own jumbo phone, the Redmi 2 , which will sell for $155.

OnePlus, another Chinese startup that is the darling of Android enthusiasts, will sell its OnePlus 2 , which features a metallic body, a fingerprint sensor and plenty of processing power, for $330.

Alcatel OneTouch, a unit of Chinese television maker TCL, wants to drive prices even lower. Steve Cistulli, senior vice president in charge of the North America region, said a flagship product should cost less than $300.

It offers its Idol 3 smartphone for $250. "The $250 price is deliberate," he said. "It's pretty much the down payment (on a premium phone)."

Many of these phones will never get into the hands of mainstream US consumers, who are more used to paying a higher price for their smartphones and still value the brand, according to IBB Consulting's Jefferson Wang.

Taking it on the chin

You think a giant like Samsung is infallible? Just take a look at its last earnings report. The Korean electronics conglomerate posted its seventh consecutive decline in quarterly profits and warned of rough times ahead.

Samsung isn't alone. Other companies that have invested heavily in the premium phone market have felt the pain. LG posted a 60 percent drop in profit, partly due to weak smartphone sales. HTC, once a top-five smartphone maker but now an also-ran that has fallen into the "other" category of players, posted losses and warned of layoffs. It once again raised questions over how it will stand up against its deeper-pocketed rivals.

"There's some shifts happening in Android right now," Moss said. "The (smartphone vendor) hierarchy is reshuffling again."

Moss, a Google veteran who worked on the original Android project and has allied himself with a key designer from HTC, said he intends to offer his smartphone at that new premium tier, which he now considers between $300 and $400.

Apple has proven to be the exception to the broader smartphone malaise, but it too showed a slight crack in its armor. The world's second-largest smartphone maker sold 47.5 million iPhones in the period -- impressive by nearly any measure, except for Wall Street's lofty expectations.

Unlike Apple, Samsung already delves in the affordable phone category. "We still offer devices at other prices and you'll find quite a bit of innovation down there as well," Denison said.

Direct to consumer

Samsung has previously said the move to monthly installment plans has helped drive sales of premium smartphones because consumers can pay off the high price of the device bit by bit over two years.

The Moto X Style (known as the Pure Edition in the US) is an example of a flagship device with a lower price than normal. Sarah Tew/CNET

But as prices for rival premium smartphones come down, consumers may start to consider the difference in monthly payments too. A Galaxy Note 5 would cost more than $29 a month for 24 months, while a Galaxy S6 Edge Plus costs $32.49.

In comparison, the Moto X Style costs $16.67 a month. It's not a huge disparity, but it's significant enough that it might give a consumer pause to reconsider the options.

Companies such as Motorola, ZTE, Huawei and Alcatel OneTouch are also starting to make their push directly to consumers. They've all set up their own websites and also partnered with retailers such as Best Buy and Amazon to get around the carriers to bring consumers their unlocked phones, named so because the devices aren't tied to a single carrier.

"This is reflective of people being more choosy with their device," said Jeff Miller, head of sales for Motorola.

If Samsung wants to compete, it should attack that mid-tier segment with more decent phones at lower prices, Wang said. One advantage Samsung has is its existing relationship with carriers.

Indeed, most people still buy their phones from a carrier when they sign up for their wireless plans. Wang believes that trend will keep Samsung safe from any sudden drop-off in demand for its phones.

But companies are making big bets on the direct-to-consumer model, suggesting change is brewing. "It's an element in the market that has incredible potential to grow," Miller said. "I'm not concerned that it has the potential to scale over time."

"The age of good-enough smartphones is coming," Wang added.

Samsung still needs to decide if it belongs in that new age.

CNET's Shara Tibken contributed to this report.