One of the nice selling points of Samsung’s Galaxy phones used to be the option of expanding memory manually. But with the Galaxy S6 and S6 Edge, Samsung sealed all that off. Jumping from a 32 to a 64 to a 128GB version of the new phones will cost an additional $100 at each increment. But it only costs Samsung $13 for 32GB of memory and less than $26 to add 64GB, according to a recent report by research firm IHS. That’s an extra $87 in profit when going up from a 32GB to 64GB model.
Why is Samsung doing this? It’s a very good way to start emulating Apple pricing model, said Andrew Rassweiler, senior director of research and analysis at IHS. The price of each storage upgrade is an additional $100 in the iPhone too.
“Samsung is using the memory structure as another way of boosting profit margin with something Apple has done since the beginning,” said Rassweiler in a phone call. “Samsung realizes and recognizes how well it works for Apple. They probably think, ‘lots of people want to start with a large amount of base memory. Let’s just do that.’ ”
The same thing with the jump in price from the Galaxy S6 to the S6 Edge with its curved screen. The cost of adding the cool curved touchscreen on the S6 Edge is only $25 more for Samsung, estimated Rassweiler, but Samsung is charging consumers at retail an additional $100 for the upgrade.
Despite an attempt to boost margins, the Galaxy S6 phones still can’t compete with Apple’s juicy numbers. The Galaxy S6 Edge is Samsung’s most expensive flagship phone yet in its building and material costs. In a recent teardown by IHS of a version of S6 Edge sold by Verizon, the Edge’s estimated build cost to be $290.45 and retails at $799.99 at Verizon. The iPhone 6 Plus with 64GB, on the other hand, has an estimated build cost of $236.04 and retails for $849 — that’s $50 more expensive than the S6 Edge.
The most expensive part for Samsung is the curved touchscreen that wraps around the sides. The screen costs Samsung an estimated $85. The second most expensive components is its processor at an estimated $29.50.
Samsung is increasingly using its own silicon inside its phone. For the S6, it dropped Qualcomm’s Snapdragon processor in favor of its own, the Exynos 7420. And in AT&T versions of the S6 that Chipworks tore down, Samsung is now starting to use its own modems in the US. (The Verizon version of the S6 Edge that IHS tore down still uses Qualcomm’s cellular modems.)
But Rassweiler doesn’t think Samsung benefits much from better margins using its own application processors or modems. “I think the advantage for Samsung is more business; more opportunity to keep those dollars in house,” Rassweiler said.
For the most part, Samsung is willing to pass up better margins in order to add fancier new features (like extra sensors or interesting curved displays) into their phone to help gain market share, said Rassweiler. Unlike Apple, Samsung has an extremely diversified business to try and make better margins in.
Ever since the Galaxy S4, the cost making its Galaxy series phones has been growing, said Rassweiler. Meanwhile, Apple has always been able to keep it in the low $200 range. “Samsung is willing to take thinner margins,” said Rassweiler. “They’re trying to stay on top.”
But boosting profit margins remains a big priority for Samsung. For 10 quarters, Samsung was able to maintain margins of around 15 percent. Then, it plummeted to 7.1 percent in the third quarter of 2014.
Follow me on Twitter @aatilley or send me an email: atilley@forbes.com
