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Alarm bells should be ringing for the smartphone industry

Samsung Earnings Guidance Analysis

Samsung’s share price dipped another 5% on Thursday, dropping back to August levels. Markets have started expecting Samsung’s profitability to decline from the autumn quarter to the Christmas quarter. Analysts also fear that Samsung’s handset sales are shifting from high-end, high margin models to low-end models more quickly than expected. Possibly not coincidentally, the hot Chinese phone vendor Xiaomi just reported its phone sales exploded to 18.7 million units in 2013. That’s up 160% from a year earlier.

Several Asian phone vendors are ramping up low-end smartphone production, attacking Asian markets vigorously and fanning out to Eastern European and African markets. At the same time, mobile app download volume growth in the Christmas of 2013 was surprisingly weak, indicating that the number of new high-end smartphone users probably dipped sharply from the previous Christmas.

The heat is on for leading brands. Motorola just announced a fairly shocking price cut for the Moto X flagship phone. Apple received surprisingly tepid preorders of just 100,000 units for its China Mobile launch during the first two days of availability. Tepid guidance commentary from leading component and contract manufacturing companies over the past two months has raised further questions about the health of the smartphone market.

The problem is not volume growth, which will likely continue topping 40% year on year. The problem is average sales price decline, which may be accelerating as consumers migrate towards models costing far less than $600 without subsidies.

After launching mobile game company SpringToys tragically early in 2000, Tero Kuittinen spent eight years doing equity research at firms including Alliance Capital and Opstock. He is currently an analyst and VP of North American sales at mobile diagnostics and expense management Alekstra, and has contributed to, Forbes and Business 2.0 Magazine in addition to BGR.