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Desperate, Samsung Will Pay You to Ditch Your iPhone for a Galaxy

The Motley Fool logo The Motley Fool 20-10-2015 Sam Mattera

Samsung's (NASDAQOTH: SSNLF) latest flagship smartphones, the Galaxy Note 5 and Galaxy S6 Edge+, made their debuts less than two months ago, but the South Korean tech giant is already offering aggressive incentives. Now through the end of the year, Samsung will pay Galaxy buyers up to $120 when they purchase new handsets, effectively reducing the phone's price. The deal is even more enticing if they're coming from one of Apple's (NASDAQ: AAPL) iPhones.

While it could prove attractive to would-be smartphone buyers, and could sway some purchase decisions, it also highlights the continued challenges Samsung's smartphone business faces.

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Samsung Galaxy Note 5. Photo: Samsung

Samsung continues to try and convert iPhone owners

Only U.S. smartphone buyers qualify for the deal, and only when they purchase the phone through an installment plan or leasing program. Given the steady decline of two-year contracts, this isn't a significant hurdle, but it is slightly different than an across-the-board price cut. At the same time, the handset must be purchased from Sprint, Verizon, T-Mobile, or US Cellular. AT&T is notably excluded, but that's still tens of millions of potential buyers.

For those who qualify, Samsung will pay the monthly cost of a handset through the end of the year, up to $120. The deal is also available to Galaxy S6 and Galaxy S6 Edge buyers, but the more expensive Note 5 and S6 Edge+ offer the potential for greater savings. Buyers coming from an iPhone who pre-register for the deal and then trade their iPhones in to their carriers receive an additional $100 in the form of Google Play store credit. That could be used to ease the ecosystem transition, allowing them to repurchase apps, music, movies or TV shows from iTunes they may have had to abandon.

The deal is similar to the test drive program Samsung offered to iPhone owners in August. Then, Samsung offered iPhone owners the chance to use one of its Galaxy smartphones for 30 days -- all they had to do was pay $1. If they liked the phone and wanted to keep it, however, they'd be charged the full price. This deal may be more enticing to consumers already considering a switch.

The struggling Galaxy business

Samsung's smartphone business has been challenged in recent months, as Apple has matched its larger screens and Chinese rivals have offered cheaper Android handsets. In the second quarter, Samsung shipped just 73.2 million handsets, down 2.3% year-over-year according to IDC. That slump may appear modest, but all other major smartphone makers, including Apple, experienced notable gains. Aggressive promotions could help Samsung's sales rebound in the quarters to come, but at the expense of its profitability.

Last week, Samsung announced that its third-quarter operating profit would come in significantly higher than last year, up about 80% to $6.3 billion. But that's still down from the third quarter of 2013, when Samsung generated $9.6 billion. Samsung's stronger earnings appear to be coming more from its components and chip businesses rather than its mobile unit. Unfortunately, Samsung didn't break out the performance of its mobile unit in its guidance, but slumping sales make the prospect of a major rebound unlikely. If Samsung's mobile business was performing better, aggressive deals wouldn't be needed.

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