Samsung Takes a Cue From Apple on Profit-Margin Strategy

Associated Press

Samsung Electronics has taken some flak for mimicking rival Apple’s design in its new Galaxy S6 and Galaxy S6 Edge smartphones.

Just as importantly for Samsung shareholders, though, the South Korean technology giant may also be borrowing from Apple’s profit margin strategy, too — part of Samsung’s efforts to rebuild its battered mobile profit margins.

Unlike previous iterations of its Galaxy S series, the new flagship handsets are the first to seal off the back of the device — annoying consumers who liked being able to swap out batteries and memory cards.

While Samsung has defended the move as a nod towards a cleaner aesthetic, there’s another silver lining for Samsung shareholders. For its customers, not so much.

With the memory sealed off at retail, Samsung is selling its Galaxy S6 and S6 Edge in 32-, 64- and 128-gigabyte versions, and Samsung is charging consumers $100 more for each incremental gain in storage capacity.

For Samsung, which manufactures its own NAND flash memory, it costs just $13 to pack in an extra 32 gigabytes of memory, and less than $26 for another extra 64 gigabytes in memory, estimates Andrew Rassweiler, senior director of research and analysis for research firm IHS, which published a teardown of a Verizon store-bought 64-gigabyte Galaxy S6 Edge.

That translates into an extra $87 of extra profit for Samsung each time it sells a 64-gigabyte Galaxy S6, and an extra $160 or so each time it sells a 128-gigabyte device, compared to a 32-gigabyte handset.

“Apple has also been structuring its iPhone offering like this for years,” Mr. Rassweiler said in a note to clients. “It boosts margins.”

The curved-screen S6 Edge, meantime, will set consumers back an extra $100 at retail — but cost Samsung just $24 more than a flat-screen S6 to manufacture. That means an extra $76 in profits for each S6 Edge that Samsung sells, provided it can keep up with demand.

So as investors look towards Samsung’s coming quarterly earnings report at the end of this month, expect plenty of interest not just in how many flagship phones Samsung sells — but how many of them boast curved screens, and how many of them carry 64 gigabytes or 128 gigabytes of memory.

Overall, research firm IHS pegged the cost of a 64-gigabyte Galaxy S6 Edge at $290.45, once the manufacturing costs and the bill of materials — everything from the display panel to the processor, memory chips and camera — are factored in. That’s the most expensive flagship smartphone that Samsung has ever made.

While the $799.99 retail selling price for that device leaves plenty of room for Samsung to make money, IHS notes that Apple’s comparable iPhone 6 Plus with 64 gigabytes of memory costs about $50 less to manufacture — and retails for $50 more — than Samsung’s device.