Will cheap phones boom push Samsung, Apple to drop prices?

Apple's iPhone margins have crept south as the company packs more features into its gadgets, trying to stand out in an increasingly crowded field. As its market share dwindles, the company enjoys less leverage to squeeze suppliers. And margins may fall further if Apple introduces bigger screens as expected.

Bernstein Research analyst Toni Sacconaghi estimates that making the screen just 30 percent larger could wipe 4-5 percentage points off gross margins. Margins on iPhones are now in the mid-40 percent range, down from 50-60 percent a few years ago, analysts estimate.

"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."

The average selling price of a smartphone globally is seen dropping by more than a fifth by 2018, to $260, according to IDC, as more buyers, especially in emerging markets, opt for price over brand, and as manufacturing costs continue to drop.

The iPhone remains the most expensive smartphone, with an estimated average selling price this year of $649, more than double the average price of $247 for Android phones, Samsung's mainstay products, according to IDC. Average selling prices of iPhones will drop only 6 percent to $610 by 2018, while Android prices will decline 18 percent to $202, according to those IDC forecasts.

"Apple has a clear strategy – to be the best in the market segment it competes in, and it has performed well," said Forrester's Teo. "Regardless of 5C sales, the bigger picture is that Apple is relevant to users in their moment of need – through an iPhone, iPad, iPod or its App store."

China chips away

All the while, competition from cheaper smartphone brands is getting fiercer. The share of smartphone shipments by vendors outside the top five - Samsung, Apple, Huawei, LG  and Lenovo – rose to 39.3 percent last year from 27.4 percent in 2011.

From Nokia to BlackBerry and a host of Chinese vendors, manufacturers are bringing out cheaper, stripped-down smartphones aimed at hundreds of millions of potential users in emerging markets such as China, India and Indonesia.

Chinese manufacturers - from global names such as Huawei and Lenovo to the less well known Gionee, Oppo and CoolPad Group - are picking up market share as they acquire technical and design expertise to add to their low production costs.

"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.