Sony Mobile Doing Much Better Than Rivals HTC, LG, and Even Samsung

If you’re a tech company, the last space you likely want to enter – if you haven’t already – is the hyper-competitive smartphone market, and if you’re already there, chances are that you’re hurting. Bad. That’s because, short of Apple and (kind of) Samsung, nobody is making money. Look no further than Sony’s 2015 mobile efforts – where all we read about is how low sales volume are compared to rivals Samsung, HTC, and LG, let alone Apple – so surely Sony needs to exit mobile, right?

(Please note that you can click on all charts for a higher resolution version)

Wrong. We’ve heard time and time again from Sony CEO Kaz Hirai that their primary focus is on premium devices and not volume – a sentiment that’s very different from most Android makers – and they’re on to something.

In theory, Sony’s strategy makes sense because, the more expensive a handset, the higher the profits on it (usually). If you’re selling a phone for only $200, there isn’t a whole lot of room for profits when you consider R&D, components, marketing, and other factors like licensing. The trouble is, Android makers are now going down the same path PC makers did a decade ago by going to war with a race towards the bottom and in turn, leaving no profits in the market.

This is worrisome for a few reasons. Charles Arthur writes:

That’s a decline of 90m, even while the overall smartphone market has grown from 704m (of which 501m were Android) to 1.43bn (of which 1.16bn were Android).

But your objection is probably the same as mine: isn’t the decrease in those sur-$500 shipments because the price of high-end Android handsets has fallen? The price you have to pay to get something with the same qualities as the $500-or-more Android flagship is lower than it was in 2012.

This is almost certainly true – but it isn’t much compensation for those struggling to expand their sales and seeing average selling prices (ASPs) fall. 

That last part is absolutely crucial, and something that many fans miss as all they see is this large pie owned by Android.

 if you keep selling the same number of phones at lower ASP, your profit will inevitably fall off a cliff as fixed costs such as staff and administration weigh you down. 

 

As we’ve seen, Sony’s units shipped have been on a steady decline with them barely registering 30 million units sold in 2015. As a comparison, Apple and Samsung do that in a quarter.

Just look at the above chart to see the sales difference between Apple, Samsung, and LG in Q4 2015. Though Sony is only surpassing HTC and Microsoft Mobile in sales, they are far ahead of the game – and even besting LG when it comes to profits despite their 2-1 sales lead. A lot more details and charts after the jump.

Let’s first examine the profits generated by each of the companies. Looking at the chart above (I know I placed operating profits there twice. Sometimes it helps to read the millions/billions and other times, the number of zeros really puts things into context), Sony is most certainly doing better than its closest competitors and it’s because of ASP (average selling price).

Once again Charles Arthur:

The real lessons of what’s going one here aren’t easy to see from a single quarter’s numbers. But if you want it in a single statistic, look at the contrast between Sony and LG. LG sold nearly twice as many phones, but Sony made a respectable profit, while LG made a loss. What’s the difference between them? ASP. Sony’s phones sold at an average price of $421.58, while LG’s were half that – $210.26. (This doesn’t mean that every LG phone sold at that price, or every Sony phone. But it tells you that Sony must have sold a lot more expensive phones than LG.)

This is where things start to get interesting. Yes, Samsung sells more phones than Apple but that’s because they sell a lot more lower-end phones, a market tier that Apple has no interest in competing in. It’s because of this that Apple enjoys a revenue that’s 2.5x higher than that of Samsung’s. This brings us back to ASP and the fact that the lower the price, the less room there is to make any money. In the case of LG, sure they still pump out high-end phones like the G5 but that’s not where their real volume is.

Sony smartly saw the writing on the wall two to three years ago as they began to withdraw from the entry Android market and focused their attention towards devices like the Xperia Z5 and Xperia X. Sure, they’re expensive, but that actually means Sony will be able to make money on them. In fact, the average selling price of Sony’s smartphones are nearly twice of that of its competitors and only beaten by Apple as you can see below.

But it’s not all roses for Sony. Despite a much higher ASP, they’re still not making a ton of money on each unit sold though they have managed to beat Samsung while LG, HTC, and Microsoft ride into oblivion and are losing a ton of money on each sale. Why even bother when you’re LG and HTC? Microsoft at least enjoys deep pockets which allows them to sustain their mobile division despite losses. That’s because Microsoft has a greater stake in the game by wanting to push Windows – especially Windows 10 – which is supposed to universally run on computers, tablets, and phones now.

In mobile, Android makers are frankly doing Google’s dirty work while losing a ton of money in the process of further Google’s agenda. As it stands, Google has little to lose if HTC or LG’s mobile efforts ceased tomorrow but a lot to gain with each new device on the market that runs Android. Below you can see how much money each manufacturer makes (or loses) on each unit sold.

Sony also faces another danger. While they are making a profit, eventually the lack of volume will catch up with them because they will inevitably hit a ceiling. As unrealistic as it sounds, let’s assume that Sony is able to make 100% profit on each unit sold. If we take their $421.58 ASP as the profit on each device, unless they are able to increase their volume, their profits and revenue will begin to decline as their units sold number slips.

Sony’s problem though is that it’s shrinking year-on-year. After a while, if your shipments are too low then even a high ASP can’t save you from your fixed costs – see HTC for the example. Still, Sony stands alone as having the highest ASP among Android OEMs. That doesn’t mean it sells the largest number of pricey handsets (Samsung surely has that title) but that it is consistently high.

Here is an interesting chart, showing you where Android users are migrating.

So what does this all mean? It means that, in the short term, despite the negative perception Sony faces, the company is actually doing much better than we had originally thought, especially in the face of its competitors. Sony has been strategically executing a game plan that many of us have been unaware of. Now we just have to hope that they also have an answer to the volume problem as well or they’re going to end up in the same place as all other Android handset makers.

Discuss:

Looking at the data above, are you more confident about Sony Mobile’s future?

[My thanks to Charles Arthur from TheOverSpill and Ben Bajarin for their always wonderful insight]

  • Ana Helušić

    Great article

  • goldenblls

    Nice piece.

    It tells me that Sony is in survival mode and if it can ride this period out for a while, bringing in some ££££ in the mean time, then it gives itself time to execute the next stage of it strategy, albeit when the time is right. One that will increase volume again.

    It shouldn’t leave it too long though.

  • Thanks Ana!

  • Yea and to be honest, even survival mode is probably too harsh of a term, seeing where LG, HTC, and Microsoft are. Even Samsung isn’t doing well but they just sell so many devices that they can hide behind the revenue. Kind of like Amazon which sucks at making money. Sony is at least now getting good at making money which is key. I don’t personally like the business model of pushing revenue higher and higher. It’s meaningless and always ends up falling apart.

  • mixedfish

    Great qualitative piece. This is the type of stuff that separates real informative/investment articles from just simple regurgitation for click-bait purposes.

  • Thanks so much for that. I think the volume story is so overblown. In that what the hell is the point of LG or HTC staying in mobile, pumping out low-end devices for numbers same while losing money on them. I simply don’t see the grand vision. Sony looked at the numbers and said the same thing. We could sells a 100 million a year, but we’d also lose a truck load of money or we could see 30 million and make a few billion.

  • -DM-

    One of the best article I’ve seen in a while…
    Usually all other sites out there are always regurgitating the same story about sales volumes as a given and leave it at that…nice to see this taken further with explanations.
    This makes a lot more sense about the new X series which I’m sure has a higher ASP…even if they might not sale a lot of units as people are still confused if the line is a midrange (and not even available in all regions) and waiting for a flagship later on the year (that includes myself)…but the phones look good with great specs so they might still make a nice profit in the meanwhile….

  • Yea, I think what lacks with reporting is context. Information is thrown to you with the assumption that you know the other pieces of the puzzle and frankly, more often than now, even the person conveying the information doesn’t know what the other puzzle pieces are. So in that way, the info is based on a vacuum and in turn, catchy but not that useful or informative.

  • Interesting perspective but flawed methodology. Even on volume you’re comparing apples to oranges. HTC and LG, as well as Sony, are in the “Others” category. The leaders are very different from what you have on the charts. Food for thought —> 😉 http://www.idc.com/getdoc.jsp?containerId=prUS40980416

  • charlesarthur

    IDC puts companies into “Others” when it wants to reserve greater detail for its paying clients. In the case of Sony, HTC, LG, Lenovo/Motorola etc we have figures for their phone shipments and for their revenue and profitability. This means we can look at how they’re performing in this market.

    By contrast we don’t know any of the revenue or profit figures for Huawei or Xiaomi. They don’t publish the figures; Huawei simply doesn’t break it out, while Xiaomi is private and doesn’t publish it at all. They’re big, but we don’t know how profitable – if at all.

  • Rafay

    Hey, nice article.
    But I have one question, have you reported the operating profits of Sony Mobile division alone or consolidated.

  • Absolutely. This is their isolated Q4 2015 earnings report (their own Q3) http://www.sonyrumors.net/2016/01/29/a-closer-look-at-the-sony-mobile-q3-2015-results/

  • That’s a great tidbit right there. Never knew that myself.

  • Daniel Etcovitch

    Great piece! I’m wondering where you got the input data to calculate per handset profit, for Samsung and Sony in particular, any chance you could share?

  • Thanks Daniel. My ASP came from Charles Arthur over at TheOverSpill though the calculation is one that many have done.

  • Dexterx Ramos

    I bet Sony for the future of smartphones and cameras. Though they lack the profits for faster development, they are steadily growing and keeps their own pace. I wanna join sony’s adventure someday when I am qualified.