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Samsung and Apple race to wrap up smartphone mass-market as profit margins suffer

Apple and Samsung will see their profits tumble if a policy of cutting prices to succeed in the wider mass market is adopted on a large scale.

Related: Samsung forecasts profit drop for second successive quarter, falling short of analyst projections

High-end growth is no longer the market being targeted by the likes of Apple and Samsung with the mass market – where devices can be bought for as low as $25 [£15] – the new battleground.

"It reflects how much Samsung is agonizing to secure margins. They're now offering premium models at lower prices as the demand outlook for high-end phones remains uncertain," Lee Seung-woo, an analyst at IBK Securities, told Reuters.

Samsung’s upcoming Galaxy S5 will, for example, cost 10 per cent less than the Galaxy S4 and some are suggesting that Apple could consider adopting a similar strategy when it releases its next smartphone later on this year.

Samsung is able to drop the price of its Galaxy S5 smartphone due to the fact that production materials have a total cost that is 10 to 15 per cent lower than the S4, though some analysts think that dropping the price will confuse consumers at the top end.

"Samsung needs to be very clear about the market segment it's pursuing," said Clement Teo, analyst at Forrester Research in Singapore. "Take Apple - it didn't drop prices on its iPhones, even with the new models. This helps it maintain a margin premium and attracts a certain loyal user base."

Apple, meanwhile, hasn’t expressed any willingness to drop its iPhone prices, which are the highest of any smartphone on the market right now. The company is heavily rumoured to be considering a larger screen size for the iPhone 6 and Bernstein Research’s Toni Sacconaghi thinks a screen that is 30 per cent larger could cause a drop of as much as four to five per cent in its gross margin.

"With the iPhone 6, Apple is likely to stick to premium pricing as it's widely expected to come with a bigger screen and some innovative design tweaks," said Doh Hyun-woo, an analyst at Mirae Asset Securities. "They are unlikely to make as much change in pricing policy as Samsung does."

When it comes to the price of smartphones, IDC research released in February revealed that the average price of a smartphone will drop from $335 [£201] in 2013 to $260 [£156] in 2018 and reflects the growing trend towards cheaper devices.

None more so is this the case than in China, where home-grown companies producing cheaper devices are managing to beat out competition from the big boys – something that will stay the same for years to come.

Related: Do’s and don’ts for smartphone makers in 2014

"The winners in the current market conditions will be those who show the best cost-efficiency, and in that sense Chinese players will be in a better position," said IBK's Lee.