The premium smartphone segment is still a niche market. While sales volumes are low, the margins are higher than in other handset categories. Accor­ding to an industry report, the premium smartphone segment (with retail prices of more than Rs 30,000) accounts for only 3 per cent of the total smartphone shipments in the country while contributing 13 per cent of total revenues.

The integration of innovative features and functions  in high-end smartphones is bolstering the demand for premium handsets every year. Features such as full HD display, cameras with high pixel count, several gigabytes of RAM and multiple core processors have become essential talking points when describing premium smartphones.  Each year a handful of high-end devices are launched with ag­g­re­ssive marketing campaigns.

An analysis of the sales volumes of various premium handset players provides an insight into the factors that have led to their strong hold in the segment. Brand loyalty is the foremost amongst them. For this, it is important for companies to have strong branding in place. The advantages of being a premium brand include short-term gains based on recognition  and long-term competitive advantages due to loyalty, which ultimately translate into revenues and profits. Many people get used to a specific smartphone brand and stick to it for years with annual upgrades; others may like to experiment with the latest offerings and switch to different brands, but within the premium portfolio only.

Further, premium models offer the ­latest operating systems, great designs, ­hardware upgrades, latest upgrades to apps that offer an enhanced user experience and ad­vanced software capabilities. Some of the processors of these smartphones are com­parable with the processors of most ­laptops. Besides, intelligent virtual voice assis­tants like Siri on iPhone, Google Assis­­tant on Pixel 2 and Bixby on Samsung devices are now being used to control and operate smartphones without physically touching the handset.

The latest research and development in­­novations that these  players are incorporating in their premium handsets allow them to leverage the first-mover advantage. This has, in turn, led to monopolistic competition with a few players catering to the high-end smartphone segment. It is important to note that market leaders like Sam­sung and Apple have acquired large market shares and are witnessing increased adoption rates in various countries mainly due to the enhanced innovations they offer every year.

Key emerging trends

On the market supply side, many China-based mobile manufacturers are coming up with their own business models through which they can offer affordable alternatives in the premium handset market. It is a known fact that most hardware vendors have a strong base in China and  almost all established mobile manufacturers usually source the hardware components from these vendors. Due to knowledge spillover, many China-based manufacturers and original equipment manufacturers (OEMs) are trying to enter the market by offering much cheaper alternatives in developing countries like India. In fact, many China-based OEMs who have experience in the mid-segment range of smartphones are offering products in the starting range of the premium segment. For instance, Apple’s latest iPhone X smartphone is priced at Rs 89,000 and offers similar features as the OnePlus 5T, which is priced at Rs 32,999. There is a huge difference in retail prices owing to Apple’s brand value. However, China-based One­Plus has leveraged its position of a market follower and has been successful in offering similar specifications at a much lower price. On the other hand, Samsung has improved its hardware and software capabilities in its flagship devices like the Samsung S8 and the Note 8 that let it integrate with the Android OS for an en­hanced user experience.

In India, the growth in the premium smartphone market has been largely due to the strong performance of companies like Apple, Samsung and OnePlus, which inc­reased the overall size of this segment. The three brands together accounted for 98 per cent of the total shipments in the premium segment. Further, OnePlus has become the top premium smartphone brand online, with a market share of 57 per cent followed by Apple at about 38 per cent and Samsung at 4 per cent. Xiaomi and Google are other brands competing in the premium segment with the Mi Mix 2 and Pixel series respectively. Other players present in this category include LG, Sony and HTC.

Challenges in the segment

The market for high-end smartphones  can saturate in the absence of disruptive innovations. Recent trends show that each year manufacturers try to bring out phones with new and exciting features; however, they seem to be falling short of the mark. A recent example is fingerprint-scanning technology. This feature has become popular over the past few years, but it has reliability and security issues. Moreover, while the market has witnessed big improvements in display resolution with smartphones with 4K screens or super-AMOLED (active-matrix organic light-emitting diode) displays, these ultimately provide the same function. In effect, this is neither a new nor a key feature; it is merely an improvement on what was already available in the market.

Today’s premium smartphones can run apps, take pictures, browse the internet, send messages and make calls, just as phones could five years ago. None of these features has changed to a degree that makes an older phone significantly less useful than the contemporary one. Premium phone manufacturers are thus faced with the challenge of introducing new features that are not mere cosmetic upgradations but also offer enhanced functionality .

The retail price of high-end smartphones is a major drawback for the segment. The nature of the market is such that the customer base is limited to loyal customers. It is a fact that premium devices are sold at very high gross margins. For instance, the new iPhone X costs Apple approximately Rs 25,000 to manufacture but it is being sold at a much higher price, with gross margins ranging from 60 per cent to 70 per cent. The brand value of companies has enabled them to maintain such high margins. Further, hardware repair costs of damaged phones tend to be exorbitantly high for the segment.

Seizing the opportunity

According to an industry report, ­smart­phone penetration in India grew by 16 per cent year on year in the first quarter of 2017, compared to 3 per cent globally, ­­in­dicating­ the growth potential in the country­. Moreover, India’s premium ­smart­phone segment grew at a record 180 per cent on a year-on-year basis during the quarter ended September 2017. Going ­forward, the growth momentum will sustain, as  a large portion of the 350 million smartphone users in India will be upgrading to their third or fourth smartphone. The ­market is seeing a significant shift, with ­customers who were earlier buying ­smartphones for Rs 15,000-Rs 30,000 now ready to pay more than Rs 30,000 for a premium smartphone with the latest features.

That said, premium smartphones in India cost much more than they do in other countries. This is because companies, especially the market leaders, have to rely on downstream retailers, which reduces their profit margins. For instance, Apple currently sells its phones through various corporate resellers and is yet to open an exclusive store in India. These companies, therefore, need to strengthen their distribution channels in the country. They should also optimise their offline and online distribution channels to standardise prices. A shift in the distribution strategy could increase sales, as it would bring down prices, ­result­ing­ in sustained growth in the segment.