Samsung, HTC Disappointing Investors: But There's Plenty of Room in the Middle

Despite posting a record quarterly operating profit, Samsung is in some trouble with investors this week after failing to meet expectations, and HTC and RIM have disappointed as well. According to analysts, the problem may be the over saturization of the high-end smartphone market—meaning the real problem may be a case of tunnel vision at smartphone companies.

Top Shelf is a Losing Game

Last week, Samsung posted earnings guidance for the second quarter that showed weaker than expected earnings, according to the Wall Street Journal. On Friday, the company took a dip in the stock market to the tune of $6.5 billion, as investors lost confidence in the company's earning ability. This, despite the fact that Samsung posted a profit growth of 44 percent to 50 percent over Q2 last year after launching its much-anticipated flagship smartphone, the Samsung Galaxy S4, at the company's high-production, Times Square simulcast unveiling at "Samsung Unpacked 2013" in mid-March at Radio City Music Hall in New York City.

HTC and BlackBerry have also had problems after unveiling and releasing high-end smartphones this spring. HTC saw its profits fall over $40 million recently, despite the launch of the solid aluminum-bodied HTC One smartphone, while its shares have lost almost a third of their value. And BlackBerry, which unveiled its new premium Z10 and Q10 devices in January, said it lost $84 million in its first quarter, after only shipping 2.7 million new smartphones.

Why the low returns after such high expectations? Why the loss of profit and, in turn, investor confidence in these smartphone manufacturers? Analysts say that demand for top shelf, high-priced, flagship smartphones is dropping, according to the Wall Street Journal. "A lot of portfolio managers are looking at smartphone exposure negatively this year, because they feel that penetration on the high-end, in developed markets, is close to peak," said Brett Simpson of Arete Research.

"The whole high-end smartphone industry is slowing ..." said analyst Dale Gai of Barclays. "It's a saturated market."

Plenty of Room in the Middle (and at the Bottom)

Simply put, these companies are focusing way too much on the top. And while flagship smartphones always get the most hype and news coverage, that's partly because the best of anything will always get more attention, but also because the top smartphones feature abilities that the rest of smartphone buyers can read about, take a look at, and hope will eventually make it into mid and low-range smartphones in the future. Basically, attention does not equal popularity, especially when these devices often range in price from $600 to $1000.

That doesn't mean that smartphone manufacturers are finished, nor does it mean that the overall smartphone market is shrinking; quite the opposite. A recent poll from the beginning of 2013 by the Pew Research Center's Internet and American Life Project found that smartphone ownership for American adults is at an all-time high. Overall, about 56 percent of Americans said they owned a smartphone, with Hispanic smartphone ownership at 60 percent.

When broken into income level and age, the most likely smartphone owners tended to be adults between the ages of 18 and 29. And income level didn't affect this age group very much, especially compared with older groups, with 90 percent of young adults making $75,000 a year or above owning smartphones, but still 77 percent of youth making less than $30,000 a year also with a smartphone.

Going deeper into the numbers, 43 percent of all adults making less than $30,000 a year owned smartphones; 52 percent making between $30,000 and $49,999; 61 percent among $50,000 to $74,999; and 78 percent for people who make more than $75,000. Overall, smartphone ownership for all U.S. adults has gone up 20 percent in the last two years.

Breaking Out of the Top-Tier Tunnel Vision

What does this mean? Well, for one, it means that smartphones are only getting more popular in general across all income levels, and if the youngest age demographic is any predictor of the future, mid-to-lower income adults will not shy away from owning a smartphone. In fact, they'll probably pay attention to flagship smartphones.

A few might buy one, but the vast majority will look to the mid-tier to meet their needs, and if smartphone manufacturers are smart, they'll focus more on providing attractive, competitive products for the mid-tier. Some are already starting to head there, with Samsung and HTC unveiling (or leaking) "mini" versions of their flagship devices, though tentatively, and not in wide release, in Samsung's case, and still not officially, in HTC's. Apple is also rumored to be working on affordable iPhones in several different colors. If true, this would be the company's first time stepping away from premium smartphone models.

But it really is a shame that Samsung and HTC have done so poorly by focusing so much investment and marketing on their top-tier products, because Android is supposed to be the operating system for the "rest of us." As Apple has skewed older and richer in its popularity, 12 percent more of the youngest adults own Android smartphones, and people making less than $30,000 are 15 percent more likely to own an Android smartphone.

Aim Higher, For the Lower-Priced

So, top Android smartphone manufacturers, why not pay a little more attention to low and middle-tier smartphones? Instead of throwing out a few cheaper devices as an afterthought following the unveiling of "the" smartphone, or just replacing the expensive components in the flagship to make a cheaper "mini," try to design mid and low-tier devices deliberately, with buyers in mind. Pack them with as many great new features as you can while still making a profit. Make them attractive. Make them exciting. Make them unique. And them reasonably priced, and you'll make your money.