- Samsung's new tablets may not contribute significantly to the bottom line given the possible high manufacturing costs and competition from Apple's iPad.
- The high-end of the smartphone and tablet market is all about the margins.
- Additionally, the company's marketing and promotional costs for the device could also be significant.
Samsung Electronics (OTC:SSNLF) recently introduced a new lineup of premium tablets called the Galaxy Tab S series, as it seeks to gain high-end market share in a tablet market that has shown signs of slowing growth. The tablets will come in two screen sizes - 8.4 inches and 10.5 inches - and will retail from $399 and $499 in the United States, depending on storage capacity and wireless configurations. While the devices do look impressive, sporting an improved design and cutting edge hardware, they may not contribute very significantly to Samsung's bottom line, given the possible high manufacturing costs and the competition from Apple's iPad, which dominates the high-end of the tablet market.
Trefis has a $1,450 price estimate for Samsung Electronics, which is about in line with the current market price.
Samsung Gaining Tablet Market Share
While global tablet shipments continue to expand, the growth rate has been declining. As of Q1 2014, tablet shipments grew by just about 3.9% compared to the same period a year ago and IDC forecasts that tablet shipments for the year will rise by just about 12.1% compared to a growth rate of around 51.8% during 2013.  However, Samsung, for its part, has been gaining traction in the market, owing to its attractive promotions and a diverse product portfolio, which includes tablets at different price points and screen sizes. During Q1 2014 the company's tablet shipments grew by around 32.% to around 11.2 million units, while market leader Apple saw its shipments fall by 16% due to supply constraints and possible saturation in the high end of the market. Samsung held about 22.3% of the global tablet market as of Q1.
Going After Apple's Market Could Prove Challenging
Apple remains the undisputed market leader in the high-end of the tablet space, with around 32% share of the overall tablet market. Samsung's new launches are targeted squarely at Apple, with the 10-inch and 8-inch versions of the Tab S occupying price points similar to those of the iPad Air and iPad Mini with Retina display. The Tab S devices, which run on a version of Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android KitKat 4.4, sport impressive hardware specifications including high-resolution Super AMOLED displays, Exynos 5 or Snapdragon 800 processors, built-in fingerprint scanners and expandable memory. Samsung also is emphasizing on the look and feel of the devices, which are thinner and lighter than Apple's competing iPad models, despite offering slightly more screen real estate. However, despite the impressive design and specifications, the tablets could face some challenges in the marketplace.
The high-end of the tablet market could grow at a slower pace compared to the lower end of the market, since premium tablets such as the iPad are more popular with customers in developed markets such as the United States, where tablet penetration is higher. Moreover, there is a lack of interest among existing tablet users to upgrade their devices frequently unlike smartphones (which are subsidy-driven), meaning that the market is likely to be approaching saturation. Additionally, Apple's domination of the high end of the market means that a large portion of users who do choose to upgrade their tablets are likely to stick to the Apple ecosystem rather than switch to Android based tablets, given the user experience and the relative cost of switching ecosystems. While Samsung has been trying to create some differentiation to its user experience by offering custom software features, such as the ability to pair the tablets to a Samsung smartphone besides offering some proprietary apps, we believe that it may not be enough to distinguish the product's software from the myriad Android-powered tablets in the market.
High-End Specifications Could Hurt Margins
The high end of the smartphone and tablet market is all about the margins. While the Galaxy Tab S lineup beats the iPad in terms of hardware, the race to beef up specifications is likely to come at a significant cost. While the cost of the bill of materials for the Galaxy Tab S is not available yet, we can get a sense of margins by comparing the 10 inch version against Apple's 16GB Wi-Fi-only iPad Air, which retails at about $499. For example, the Galaxy Tab's most significant cost driver is likely to be its high-resolution AMOLED display, while in contrast the iPad uses a slightly smaller and lower resolution LCD based display. The new Galaxy tablets also pack in fingerprint sensors, higher RAM and higher resolution cameras compared to the iPad. Given that the iPad Air cost an estimated $275 to build (at the time of launch, excluding manufacturing costs),  it is safe to assume that the Samsung device will cost significantly more given its beefier specifications. Although Samsung could source several of the components from its own components business, we don't believe it will help to cut costs significantly. Additionally, the company's marketing and promotional costs for the device could also be significant.
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