LG Exits Phone Business: Key Takeaways
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The smartphone industry is littered with big brands that stumbled and could not profitably stay in the game, and LG is the latest to decide not to continue losing hundreds of millions of dollars a year in the phone business. Most of the direct profits from smartphone sales have gone to Apple and Samsung, and LG was never able to find a consistent identity, price its phones properly, or use phones to anchor other businesses – IoT, software, or services – that would justify selling phones as a loss leader.
Samsung is the biggest beneficiary of its cross-town rival exiting the smartphone business. LG was already marginalized in most Asian and European markets, but LG still drove respectable sales volumes in the U.S. prepaid market, and that is where its absence will open opportunities for competitors besides Samsung. LG was also planning a rollable phone; the race to commercialize this new form factor now shifts to Samsung, TCL, Xiaomi, and OPPO.
What Went Wrong?
LG G5, LG Wing, LG Velvet in DualCase (Techsponential collection)
Smartphone competition is brutal, and despite some exceptional innovation, LG failed at several key points in its history. After Apple established what a modern smartphone should look like with the original iPhone, Apple steadily built a sticky ecosystem that drew in the highest spenders. In the early Android era, Samsung competed with Apple by offering the biggest, most color saturated displays and then simply outspent everyone – including LG – on marketing and merchandising at point of sale. The turning point for LG may have been the transition from the LG G4 in 2015 (a modest success) to the modular LG G5 a year later (a disaster). After that point, LG continued to product solid phones, but was not able establish a consistent mainstream identity. It would try a feature for one generation, then switch to something else the following year. Pricing would start out high and then nosedive immediately after launch.
If LG had been able to break even on hardware and use smartphones to drive services, IoT, or sales of its superb televisions and appliances, it might have been able to sustain the phone business indefinitely. However, LG never tried the software and services approach. LG did try to establish “ThinQ” (pronounced, “thin queue”) as an IoT platform tying together all its consumer products, but that has its own problems. Without establishing a rationale for treating phones as a loss leader, LG was simply left with the losses.
Competitive Implications – Premium Tier: Samsung Is the Clear Winner
LG was largely a non-factor in most European and Asian markets, where Apple and Samsung face numerous Chinese brands and their budget spin-offs. They will barely notice LG’s absence – in large part, they are the reason LG is leaving.
However, in the U.S. (and certainly in South Korea) LG will be missed. Samsung was already winning every head-to-head battle for premium phone sales with LG at retail. Still, after each phone’s initial launch, LG’s prices plummeted or carriers offered BOGOs to clear inventory, and those sales hurt Samsung. In the U.S., there are several companies vying to compete with Samsung in the premium tier, including Google, OnePlus, Microsoft, and Motorola, but above $500 Samsung is the default Android choice of consumers and carrier reps alike, making Samsung the obvious winner of LG’s exit.
LG had staked its future premium roadmap on new form factors. The rotating “T”-shaped LG Wing was a flop, but a rollable phone LG teased during its CES 2021 virtual press conference looked promising. However, LG leaving the market hardly means that this new form factor is dead. TCL, OPPO, and Xiaomi have all shown prototypes of a similar device (Techsponential has gotten hands on with an early concept version from TCL), and Samsung has publicly committed to the concept as well. It is unclear what compromises a rollable phone in the real world will require in terms of cost, features, or durability -- from any brand. LG clearly determined that it was unlikely to have a breakout hit, though the IP may live on in other flexible display consumer electronics from LG’s other divisions.
Competitive Implications – Entry and Mid-Tier: Samsung, TCL, Motorola, and OnePlus
LG’s remaining stronghold was U.S. prepaid. Wave7 Research reports that LG was over a quarter of all sales at Metro by T-Mobile, and the LG Stylo 6 was the top prepaid device in March 2021. Samsung has a strong mid-tier lineup that will benefit from LG’s abdication, too; the Galaxy A-series has just gotten solid updates for Europe and Asia, and U.S. variants are almost certainly coming soon. While Samsung’s rivals will almost certainly pick up market share in prepaid once LG’s inventory is sold out, Samsung is a closer brand match for entry level buyers willing to pay a bit more for a company they are more familiar with.
At lower price points, there is considerably lower brand loyalty, but the most aggressive Chinese brands are largely kept out of the U.S. market by carrier control of the retail channel. Huawei and ZTE have been pushed out by political pressure. That gives the three Chinese companies who have managed to secure U.S. carrier shelf space – TCL and its Alcatel brand, Lenovo’s Motorola, and BBK’s OnePlus - the opportunity to take over LG’s sales. OnePlus is new to the budget space, and it only has prepaid distribution at T-Mobile and Metro for now. Motorola has is emerging from a long turnaround characterized by disciplined product management; it is unlikely to throw caution to the wind and chase after market share at all costs, but it does offer G series phones with stylus’ like LG’s Stylo and should pick up some business. If TCL can move quickly and field products at LG’s price points with carrier-friendly tweaks, it may be able to grow the most.
There are also longshots. AT&T is already tapping Vietnam’s VinSmart for a pair of cheap prepaid 4G smartphones at AT&T and Cricket, and there are any number of ODMs eager for that type of business. However, the more likely new market entrant is Xiaomi. This is still extremely unlikely – Xiaomi has tried to find a profitable way into the U.S. smartphone market for years – but if anyone is going to try to use LG’s exit from the market as a catalyst for expansion, it would be Xiaomi.
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