Large-screen smartphones have become an important segment in the smartphone category, with no company benefiting more from the sales of these "phablets" than Samsung (NASDAQOTH: SSNLF). But Samsung's decision to offer these displays on a large number of models across pricing tiers is making it increasingly difficult for the Korean conglomerate to differentiate its high-margin, premium devices from its lower-priced smartphones. At the same time, Apple (AAPL +2.65%) and Microsoft (MSFT +0.60%) have created smartphone display strategies that will allow both companies to benefit from the growing demand for larger displays at the high end of the smartphone market.
Samsung's smartphone display history
In 2010, Samsung introduced the Galaxy S with a 4-inch display, the company's first large-screen smartphone. The Galaxy S was an instant success, selling 10 million units in its launch year.
The success of the Galaxy S inspired Samsung to offer an astonishingly wide range of screen sizes, including 4-inch, 4.3-inch, 4.7-inch, 4.8-inch, 5-inch, 5.3-inch, 5.8-inch, and 6.3-inch displays. In addition, the larger screens were offered on a broad range of the company's smartphone models, across multiple pricing tiers. While the wide range of displays resulted in impressive market-share gains, the strategy appears to have made larger screens a commoditized feature for Samsung's smartphones.
A recent Canalys report noted a trend showing demand for larger displays shifting to premium smartphones. But, despite the company's dominance in the large-screen smartphone category, Samsung may be missing the boat. In Samsung's most recent quarter, the company reported slowing demand for its premium smartphones. And despite increases in total smartphone shipments, profits for the company's mobile business actually declined.
Samsung's large-screen mistake
What Samsung failed to realize: When larger displays are reserved for premium devices, the high value of the feature can be used to support a company's premium pricing tier and help buyers quickly identify a company's flagship products.
Are Apple and Microsoft taking Samsung to school with their display strategies?
With the latest Lumia line of smartphones, Microsoft reserved the largest screen size -- 5-inch -- for the Lumia 930, the most expensive smartphone in the new Lumia line. Only two lower-priced devices are offered -- the Lumia 630 and 635 -- and both sport a smaller screen size. And while other features help to differentiate the models by limiting the choices offered and reserving the largest screen for its flagship model, Microsoft has adopted a display strategy that guides those wanting a larger screen to its premium-priced smartphone.
It appears that Cupertino will move even more aggressively to take advantage of the increasing demand for larger-screen smartphones at the high end of the market. The iPhone 6, with an anticipated 4.7-inch screen, is expected to have a subsidized starting price of $299 on a two-year contract -- a $100 increase over the iPhone 5s. The history of iPhone sales indicates the new pricing strategy has a good chance for success. With the 2013 introduction of the iPhone 5s and iPhone 5c, Apple discovered that iPhone buyers chose the higher-priced iPhone 5s at rates that exceeded the company's expectations. The proclivity of iPhone buyers to "trade-up" in price is allowing Apple the opportunity to test a new "super-premium" iPhone pricing tier.
Final thoughts
Samsung's larger-screen strategy looks to be a contributing factor in its weakening premium smartphone business. Meanwhile, Microsoft and Apple are leveraging the high demand for large-screen smartphones to differentiate and support the pricing of their premium devices. In the case of Apple, with iPhone sales dominating overall company revenue, investors will be able to monitor the iPhone 6's effect on revenues and company margins. In addition, investors should track iPhone average sales prices in the company's quarterly reports. Increases in these metrics would indicate that the company is successfully using larger displays as part of the its strategy to maintain Apple's smartphone pricing power.
