As an author of genre fiction, I’ve been watching an interesting phenomenon for some years now. Although many will disagree with me, this new world behavior began with Apple and the $0.99 song and app. Once this beast was unleashed, consumers realized how much indirect control they really had. If they didn’t buy, the prices would drop. Once the prices dropped to a level in line with the consumer’s ideal, they’d buy.

And buy.

And buy.

In fact, they’d buy until that $.99 price point was no longer the ideal. The consumer got wise and realized, if I wait long enough, it’ll be free.

This happens not just in the music industry, but also in the world of books. Quite frankly, it’s hurting both. This “race to the bottom” has caused a lot of artists to give away their work, more often than not, for free. For some of us, we have to consider certain pieces of work “loss leaders” to get consumers interested.

But what happens when carriers start seeing smartphones as their “loss leaders” to sell their services? When the price of those phones drops well below profitability? Of course, the idea of profitability is a relative term (depending on which company you have under the microscope). According to Samsung, they’re looking at a steep drop in profit from a year ago — a drop by as much as 60%. No matter what company you’re looking at, that’s a significant decrease in profit.

However, when the devices become the loss leaders for the carriers, who winds up actually paying? The consumer.

The problem is threefold:

  • Samsung will pass the loss to the carriers
  • Samsung will probably knee jerk their way into jettisoning a great deal of employees in the race back to profitability at the same time the whole of the industry continues its downward race to the bottom
  • The carriers will somehow pass the loss to the consumer

Why is this happening? I did some research on phone costs in the 1980s. Now, these were landlines, so the technology is obviously very different. I found one reference to a monthly phone charge in 1984 coming in at a whopping $9.41 per month. Accounting for inflation, that same landline would cost $21.54 today. Let’s reverse that for the average smartphone plan. Today, the average plan ranges from $80.00 to $100.00 per month. We’ll go with $90. In 1984, that would cost $39.31 or roughly four times the cost of the landline. Add to that, the cost of mobile data in the US is significantly higher than that of other countries. For example, 500 MB of data usage in Austria (in 2013) cost roughly $4.70 per month. In the US, that same amount of data cost a staggering $85.00.

US carriers are gouging consumers. Period. The cost of service alone is out of control in the US. It’s fairly easy to understand why consumers don’t want to also have to pay for the devices in which to use the service. So, when a consumer purchases their smartphone, they hold onto it until:

  • They are woo’d by a newer, shinier object
  • Their device fails

Because of this, the likes of Samsung has two choices:

  • Constantly create newer, shinier devices
  • Lower the cost of their devices to entice people to upgrade

But what happens when they’re spending so much money on marketing at the same time they must drastically reduce the prices of their smartphones? Profit sinks. This is happening, even though the sales of Samsung smartphones are slightly up. And when they release an overall disappointing device (such as the Galaxy S5), those losses really add up.

This is the race to the bottom. Consumers demand the lowest possible prices, while the manufacturers fight to make a profit. At some point, the demand for the lowest possible price will bottom out and the likes of Samsung might have to find a new way to profit from the sales of smartphones.

Even if Samsung were to release the single greatest mobile device in the history of devices, consumers are only willing to pay so much. That so much is not much. Yes, there will always be early adopters willing to shell out a premium, but even the early adopters are wising up and no longer dropping upwards to $800.00 for a device.

So, this race to the bottom will continue to cut into another bottom — the bottom line. Does this mean Samsung needs to retool their business? Maybe. Or maybe the whole of the industry needs a facelift such that everyone benefits (instead of manufacturers passing on the loss to carriers, who then pass the loss to consumers).

The solution is a multi-layered disaster that probably won’t come to light for some time … at least, not until the race to the bottom bottoms out.

What is the solution? Can Samsung salvage the current business model? If so, what do you think they should do in light of significant profit loss? Let us know your thoughts in the discussion thread below.