BayStreet Research Blog





GS8 Promotional Weakness: While we were expecting slightly more aggressive GS8 promotions y/y, T-Mobile preferred to remain on the sidelines, allowing AT&T & Verizon to offer relatively weaker GS8 launch promotions vs last year. Last year, all carriers quickly matched T-Mobile's aggressive BOGO offer at launch. This year, only Sprint offered an aggressive BOGO lease offer at launch, as AT&T’s BOGO requires home TV service and Verizon’s GS8 discount promo has a variety of requirements. Subsequently, we are tracking Sprint up the most y/y vs the GS7 at ~30%+. AT&T and VZ are essentially flat and T-Mobile down the most at ~15%. Overall we have the GS8 flat y/y through April, and while we expect increased promotional focus in Q2, we would not be surprised to see the GS8 down 10%+ vs the GS7 through the end of Q3. {The Data Walk Vol. 180}

  • 9 May, 2017




  • Android Competition Heating Up: While Motorola’s presence in the US has been limited to Verizon the last few years, the OEM is on track to launch across carriers in the 2H17. In addition, Nokia (HMD) is potentially entering the market and we expect ZTE to continue to grow its business across carriers. TCL is also on the verge of entering T-Mobile with a white labeled device. With LG the primary Android alternative to Samsung at most carriers, we could see LG’s struggles worsen considerably in the coming months. {The Data Walk Vol. 180}

    • 9 May, 2017




    • Red iPhones: While the unexpected late March release of red iPhones was interestingly timed near Android flagship announcements, the impact on iPhone sell-thru has been minimal thus far. Initial checks indicate a general lack of awareness among consumers, with sales predominately to customers already intent on buying an iPhone. Although AT&T, Sprint and Verizon appear to have received healthy initial supply, availability at T-Mobile has been scarce, with most stores having yet to receive an initial shipment. While we do not anticipate a material impact on overall iPhone sales in the June Q, the ability for sales reps to mention a recently launched iPhone SKU will certainly not hurt. {The Data Walk Vol. 179}

      • 6 April, 2017




      • Latest Galaxy S8 Thoughts: We have written previously (The Data Walk Vol. 174) of the difficult comps the GS8s will have to the GS7s, including how the GS7s gained virtually all remaining premium Android share in 2016 and Samsung's historic inability to gain premium share from Apple. With what is likely Samsung's most important smartphone launch in history, the latest rumors of both GS8s having curved displays and lacking dual cameras is making us slightly more cautious. Since launch, the curved variant of the Galaxy S family has consistently been 50% or less of Galaxy S mix at every carrier. Combined with constant rumors of an upcoming 10th anniversary iPhone, Samsung's most important smartphone launch is happening in its most difficult launch environment ever. {The Data Walk Vol. 177}

        • 7 March, 2017




        • ZTE Poised to Expand US Presence?: With today's news of ZTE settling with the DOJ, ZTE could have removed its last major obstacle to a larger US presence. ZTE has been in the US market for ~5 years and has slowly grown into the clear #3 prepaid smartphone vendor behind LG and Samsung with quarterly volumes of ~1.5M. Postpaid trends have been smaller and mostly limited to T-Mobile, but ZTE has recently benefitted from the successful ZMax Pro launch. The device's high-quality specs and low price have made it a low-end hit at T-Mobile. Interestingly, ZTE is currently in all the national prepaid carriers (except Verizon’s) and with the DOJ issues behind them, has the history and relationships to expand into postpaid. {The Data Walk Vol. 177}

          • 7 March, 2017




          • AT&T's Changing Focus? AT&T appears much less focused on competing for smartphone subscribers compared to the past ~10 years. Previously, AT&T would promote its broad portfolio of devices and was quick to match the other carriers’ promotions. Today, AT&T's smartphone portfolio has shrunk to 18 SKUs from 32 in 2015 and recent promos require adding home TV service. Conversely, Verizon has brought in Google’s Pixels and continues to promote a differentiated Motorola line up. Except for AT&T, all carriers continue to cycle traditional device promos, such as BOGOs, bundles, and discounts. AT&T's new approach appears to assume consumers will buy either an iPhone or Samsung flagship, with reps instead focused on selling consumers a differentiated portfolio of services, not devices. {The Data Walk Vol. 175}


            Verizon Raises the Bar: While T-Mobile has certainly been the most promotive carrier over the last few years, Verizon has responded in multiple ways in the back half of 2016. Beginning in July, Verizon launched its first free smartphone offer, addressing a previously ignored low-end segment. Verizon then raised the bar over the holidays as we tracked, in addition to a broad portfolio of free low-end phones, staggered one to two-day flagship promotions for half off ($400) and even free iPhone 7s, GS7s and Pixels with trade in. Interestingly these flagship promotions were not broadly communicated and only available for a very limited time. It appears when combined with Verizon's exclusive on the Google Pixel, a device well aligned with T-Mobile's younger tech-savvy customer base, that Verizon is determined to slow T-Mobile. {The Data Walk Vol. 174}


            Looking Ahead to the Galaxy S8: As we evaluate the opportunity for the GS8, our initial thoughts go to the difficult comps set by GS7 BOGO promotions at launch. These unprecedented promotions allowed the GS7s to gain virtually all high-end Android share available from LG and HTC and cannibalize nearly all legacy GS6 sales. With such a difficult comp, combined with Samsung's historic inability to gain meaningful share from Apple, we are expecting only low single digit growth y/y for the GS8's. Ironically, this growth is driven in large part by the lack of the Note 7 in the portfolio. We are also very interested to see if discounted GS7s can lead to the return of meaningful legacy device sales in 2Q17. {The Data Walk Vol. 174}


            Pixel Outperforms: Verizon’s sales force is one of the industry’s most influential and thus when we tracked weak Pixel preorders and general lack of sales rep enthusiasm, we were concerned. However, we have seen an abrupt change in attitude, with reps now enthusiastically recommending the Pixel, especially for Note 7 switchers. Interestingly, the main selling points have been the Pixel's "pure" Android experience, lack of carrier bloatware and unlimited cloud storage with virtually zero mention of Google’s Assistant. Assuming Google & HTC can improve supply in Q4, we can now easily see these devices taking share from Samsung and eventually supplanting Motorola as the #2 Android OEM at VZ. {The Data Walk Vol. 170}


            Note 7 Update: As we highlighted last month, we are tracking the impact of the Note 7 recall along two key variables. 1) Samsung loyalty and 2) willingness to leave Android. Our October trends highlighted slightly weaker Samsung loyalty with our base case now slightly lower at ˜65% versus 70% last month. However, within the ˜35% leaving Samsung, willingness to leave Android has been much higher than expected with an overwhelming majority (80%+) choosing iOS. We believe this supports the view of Note customers preferring premium brand/status over the Android ecosystem. While this is a mild positive of Apple, our estimates for iPhone sales from Note 7 switchers only increases by 300k in 4Q16 to 550k. {The Data Walk Vol. 170}


            Google Pixel: Last week’s Pixel announcement is intriguing from many perspectives, including the choice of an exclusive carrier, the potential for Pixel-only Google services and Google’s renewed effort to sell devices direct to consumers. Longer term, we believe the Pixel offers an important hedge to Samsung’s premium Android dominance and provides Google an excellent opportunity to innovate on an unfragmented platform, much like Apple. However, in the near term, we are not yet convinced the Pixels differentiate themselves enough from Apple and Samsung’s current flagships. Furthermore, with Motorola also selling exclusive flagship devices at Verizon, the first generation Pixels’ road to success will be far from easy. {The Data Walk Vol. 169}


            Note 7 Beneficiaries: With Samsung ending Note 7 sales, we believe understanding the impact lies within two key variables. The first is the percentage of customers likely to remain loyal to Samsung. We believe the vast majority (70%) will remain with Samsung and likely choose a Galaxy S7 device alternative. The second, and more difficult variable, is what percentage of switchers are willing to leave the Android ecosystem. Note customers are aspirational and value premium brands, and thus the iPhone could certainly appeal to them. However, Note customers are also among Samsung's most loyal. Our base case assumes roughly half of switchers (or 15% of total) will choose an iOS device, which equates to only a 200-300k increase to 4Q16 iPhone sales. {The Data Walk Vol. 169}


            Note 7 Aftermath: Smartphone recalls are rare and we have never seen one in our 15 years of market coverage. Samsung appears to be handling the recall extremely well and could have most, if not all, of the defective units replaced by the end of September. While we believe potential Note 7 buyers will be mostly channeled into a GS7 or GS7 Edge, the prime beneficiaries outside of Samsung will likely be the iPhone 7 Plus and, to a lesser extent, the LG V20. We are very interested in monitoring how long consumer and carrier sales reps’ memories are regarding this unfortunate situation. {The Data Walk Vol. 167}


            The Return of the Free Phone and Verizon’s New Value Focus: In Jul, T-Mobile began offering free (after 24 monthly credits) low-end Samsung (On5 & J7) and LG (K7 & K10) devices with $65/6GB and higher rate plans. These promotions were certainly successful, with the On5 quickly going on backorder. Verizon was the first carrier to respond, and in late Jul offered a free Samsung J3v (after 24 monthly credits) with a $55/2GB data plan. While T-Mobile has consistently and successfully focused on the low-end smartphone market, Verizon has rarely offered such aggressive low-end promotions, and has consistently been the last carrier to pursue these consumers. We are interested to see if Verizon remains committed to this segment, and whether AT&T and Sprint follow with free low-end device offers. {The Data Walk Vol. 165}


            Pokémon Go Impact: We have received a number of inquiries about the impact of Pokémon GO on US smartphone sales. While high-end devices as old as the Samsung GS4, LG G3 and iPhone 5 have the power and gyroscope to run the AR functionality of the game, we are not seeing any noticeable change in the run rates of premium devices. Should the phenomenon continue, we would expect the first impact to be a mix shift from ultra-low-end devices that lack the minimum requirements to run the game, to low-end devices like the Samsung J3 and LG K7 that can run the game, but without the AR functionality. {The Data Walk Vol. 165}


            Connected Apple Watch Impact: The more we analyze the eventual impact of a connected Apple Watch, the more we realize this, like installment pricing and a maturing smartphone market, will likely lengthen the iPhone upgrade cycle. The more screens a user has to access their digital lives, the less role any one device plays. Much like how smartphones and tablets have elongated the PC upgrade cycle, the connected Apple Watch will likely elongate the iPhone upgrade cycle as it takes over many of the roles that were previously exclusive to the smartphone. {The Data Walk Vol. 164}


            iPhone Upgrade Model: Using our monthly US iPhone sales data, we modeled upgrades as a percent of sales for upgrade cohorts of 12, 24, 36 and 48 months for each SKU. Assuming the weighted average upgrade for each SKU increased from ˜22 months in 2007 to ˜28 months in 2015, upgrades as a percent of sales increased from 68% in 4Q14 to 72% in 4Q15. If we assume 75% of 4Q16 sales are upgrades, only 33% of 4Q14 iPhone 6 buyers need to upgrade to achieve flat US iPhone sales y/y. {The Data Walk Vol. 164}

            Apple and Samsung Control 91% of the US Postpaid Smartphone Market

            Over the past eight quarters, smartphone manufacturers Apple and Samsung have increased their combined market share of the U.S postpaid smartphone market from 82% to 91%. During this same time, manufacturers such as LG, Motorola, HTC, and others have seen their combined share reduced by half from 18% in Q2 of 2014 to 9% in Q2 of 2016, according to the latest BayStreet Research estimates ending May 31st.
            To make matters worse, the market for postpaid smartphones continues to contract and is on pace to decline 9.4% year over year in Q2 to roughly 20 million units. The combined effect of Apple and Samsung’s share gains and the shrinking market will result in only 1.7M total postpaid smartphones sold by other OEMS in Q2 of 2016, compared to 2.7M in the same quarter last year, a 37% decline.
            Cliff Maldonado, Founder and Principal Analyst at BayStreet Research, comments: "The combination of a maturing U.S. postpaid smartphone market and aggressive Apple and Samsung "buy one, get one free" promotions in the last few months has created a bleak environment for the other Android smartphone manufacturers. The premium smartphone market has fewer and fewer alternatives to Apple and Samsung and we don’t see this changing anytime soon."
            SOURCE




Apple Not Losing Share: Despite unprecedented promotions, an award winning GS7/GS7E and a relatively underwhelming iPhone 6S, Samsung has gained only slight share from Apple in 1H16 in the US. The vast majority of GS7 gains have come from fellow Android OEMs, LG and HTC. The difficulty of getting iPhone customers to switch in large numbers has only grown clearer this year and it appears Samsung’s remaining high margin growth will likely come from gaining virtually 100% premium Android share. {The Data Walk Vol. 162}


Promo Fatigue: Despite the carriers continually one upping themselves with ever more aggressive promotions (VZ’s latest is a free 50" Samsung Smart TV with 2 line activation), the overall smartphone market remains weak and has not increased in-line with the level of increased promotion. These aggressive promos are mostly driving share shifts between the OEMs and increasing sales of flagship devices at the expense of legacy flagships and mid to low-end Android devices. It will be interesting to see if the higher level of promotion activity continues into the iPhone 7 launch and how, if at all, Apple benefits. We certainly expect to see higher promotional activity y/y. {The Data Walk Vol. 162}


Running Out of Room: The combination of a maturing US postpaid smartphone market and aggressive Samsung BOGO promotions in March has created a bleak environment for the other Android OEMs. In 2Q15, Apple and Samsung controlled ˜85% of the US postpaid market, leaving roughly 2.8M units for the other Android OEMs. As we enter 2Q16, we estimate Apple and Samsung will control ˜90% of the postpaid market, leaving ˜30% less or 1.9M units for the remaining Android OEMs to address. {The Data Walk Vol. 160}


Samsung Simplifies: In early Sep 2015 (Data Walk Vol. 147), we wrote that Samsung’s 2015 GS6/Note 5 portfolio was confusing and lacked a pricing structure in line with what consumers value. Samsung’s 2016 portfolio is much cleaner, offering the flagship GS7 and, for an extra $100, a larger screen GS7 with curved display. No longer is Samsung charging a premium solely for a curved display. We believe the Note 6 launch will come in at a $100 premium to the GS7 Edge, offering an even larger screen and stylus. While BOGO and free VR headset promotions certainly drove unexpected strength in Q1, Samsung deserves credit for streamlining their portfolio and pricing. With rumors of more than two devices launching in Sep and an already large portfolio, we are concerned Apple may be poised to repeat Samsung’s 2015 miscues. {The Data Walk Vol. 160}


GS7 Cannibalization: While the initial success of the GS7 has outperformed our most optimistic expectations, it is important to note that Samsung’s legacy flagship portfolio (Note 5, GS6, GS6E and GS6E+) has slowed more than expected. This is partially due to the lack of price reduction on Samsung’s GS6, which occurred unusually early (Aug 15) in its lifespan. Consequently, the legacy flagship portfolio has declined 60%+ m/m vs last year’s ˜40%. Overall, Samsung’s flagship portfolio is still up a very healthy ˜25% y/y. {The Data Walk Vol. 159}


Upcoming Apple Event: As we’ve highlighted previously, Apple is set to launch a refreshed iPhone 5S later this month. In our opinion, the key to the announcement is whether or not the current 5S stays in the line-up and at what price. If the 5S is discontinued, we see only a minor benefit for US iPhone sales and would expect a normal low single digit sequential decline in the June Q. However, if the iPhone 5S remains in the portfolio at $350, or as rumored at $250, we could easily see sequential growth in the June Q. It is important to note that we have been tracking the iPhone 5S at $250 (before subsidy) at Cricket, where it has sold well for its price tier. {The Data Walk Vol. 157}


March Launch Bonanza: Traditionally, Q1 is a quiet period for US smartphone launches and promotions. Carriers often clear inventory in anticipation of Android flagship launches in April & May. This year is shaping up as quite a bit different with Apple, Samsung and LG all on tap to launch devices in March. Last year’s Apple Watch coverage certainly disrupted Samsung’s GS6 launch buzz and this year could be similar, as Samsung deals with iPhone 5SE coverage and the launch of LG’s G5. Interestingly, HTC could benefit from launching its M10 later in Q2. {The Data Walk Vol. 155}


Key Differences for 6S Cycle: When we compare Apple’s prospects for its 6S cycle versus the 5S cycle, we highlight four key differences in the US. First, carrier promotions are much more aggressive than under the subsidy model two years ago. Consumers can now easily upgrade out of cycle at a much lower upfront cost with carriers willing to reimburse termination fees when switching carriers. Second, the perceived innovation from the 4S to 5S was much smaller than it is from the 5S to large screen 6S. Third, Apple’s portfolio is considerably larger now with 5 SKUs versus only 3 for the 5S cycle, allowing Apple to gain share at lower price points. Finally, Apple’s key Android competition is weaker now. Samsung’s GS6 missed the mark on differentiation vs the iPhone and has ceded share to Apple throughout 2015. So while the market is certainly slowing, Apple is in a position to continue to gain share and grow y/y. {The Data Walk Vol. 154}

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