Smartphone market leader Samsung's (NASDAQOTH: SSNLF) second-quarter earnings report could be described as unsurprisingly disappointing. On one hand, the company's heavily watched operating profit came in at 6.9 trillion won ($5.9 billion), down 4% year over year and capping off seven consecutive quarters of declines. However, the 6.9 trillion won total was clearly communicated earlier this month, as Samsung updated this guidance early in July to this exact figure.
In the mobile division, however, the results were even more stark. Operating profit fell to 2.76 trillion won ($2.3 billion) from 4.42 trillion won ($3.8 billion) in the year before. That's important because last year's flagship Galaxy S5 phone was widely considered a disappointment and was a drag on performance. In all fairness to Samsung, however, many analysts blame the company's inability to gauge demand for its curved Galaxy S6 Edge version for lower profit.
However, their actions point to more than supply issues in moving its high-end units. In its press release, the company wrote: "... sales momentum for high-end products will be maintained by adjusting the price of the Galaxy S6 and S6 Edge and introducing new premium smartphone models." In this case "adjust" is a euphemism for "cut," Samsung is reducing Galaxy S6 prices. Does this make sense?
Priced higher than the iPhone, but that's probably not the issue
Samsung's newest model is priced higher than Apple's, with a caveat. Apple's entry-level version of its iPhone 6 costs $649 direct from the company's website and through carriers without contracts. Samsung's entry-level unit comes in at $685. It should be noted, however, that Samsung's entry-level version comes equipped with 32GB of storage whereas Apple's iPhone 6 starts with 16GB.
When buying high-end phones, $36 is probably not the key factor in the buying decision, especially when storage is considered and if the purchaser is buying the phone with a device subsidy. Instead, the decision to buy one phone over another is a complicated mix of ecosystem, design and finish, and brand affinity. While Samsung could possibly reinvigorate Galaxy sales a little by a rather large price cut, it is rather safe to assume its current high prices aren't the reason for its sluggish sales.
Does Samsung's approach even make sense?
Furthermore, the prescription does not seem to match the diagnosis. On one hand, the company itself hinted at supply issues as the reason for lower-than-expected sales and profit figures, but is attempting to solve that by lowering prices? In healthy-functioning, truly free markets for profit-seeking entities, the proper prescription for supply not being able to meet demand is to increase supply or to increase (not decrease!) the per-unit price until demand meets supply, or some combination of the two.
Instead, Samsung is doing the exact opposite of those things. The company is lowering prices, presumably to increase demand. And I think that's the correct move because I think the supply issue is being overplayed. Simply put, the company is losing out to Apple's iPhone at the high end, and lowering the price of the Galaxy S6 substantially could help to increase sales. Earlier this year, the company estimated it would set a sales record for its Galaxy line with the Galaxy S6. I think a price cut is an admission that this probably won't happen.