What makes your smartphone so expensive?

March 17, 2014 10:15 AM

Consumer electronics’ pricing usually depends on how mainstream the technology they are based on is. This phenomenon, albeit cautiously observed by most customers, is the arch-enemy of every early adopter’s wallets, which drop extra cash in the form of a premium for novelty.

smartphonesAlthough the so-called smartphone market has existed for more than a decade, actual smartphones, as we know them nowadays, are not so old. In 2007, when the first iPhone came out, it completely redefined what a smartphone is and how much it should cost. Subsequently, not only had the legacy phone manufacturers to narrow down the technological gap that Apple created, but they also had to come up with devices in the same price range and with comparable added value attached to them. This has caused major distress for most market players, which struggled in both challenges. Although they still managed to sell their low-end products for a few additional years, the feature phone market was shrinking, and retail prices, along with economical margin, got thinner. This trend forced OEMs which were not seriously committed to deliver high added value phones out of the race, and brought the number of profitable market players down to a few.

Retrospectively, despite the tremendous improvement that they represented over their predecessors, first generation smartphones’ hardware specifications greatly limited their abilities, and it is only recently that hardware manufacturers have caught up with people’s expectations of how fast and fluid a phone should be.

As far as the average Joe is concerned, almost any current smartphone, be it an iPhone, Android or Windows Phone, has sufficiently powered internals and a sharp enough screen to render content on. Thus, performance is no longer enough to differentiate a flagship from entry-level smartphones, and pricing is now a trickier task to handle for marketing departments.

In order to maintain high retail prices, and save their commercial margins, OEMs’ go-to response has been to stuff their high-end products with tones of distinctive features, often ridiculously dubbed. 2014 flagships boast interesting, yet secondary features like waterproof hardware, fingerprint scanners or software features ranging from useful (e.g., hands-free voice control) to pure gimmicks (e.g., heart-rate monitor).

Given that no drastic technological revolution has happened since the first iPhone launch, OEMs have been able to iterate on their products, and are now able to produce a great phone for much cheaper. However, additional features, which actually may set a phone apart from its competitors, may represent a bigger chunk of a phone’s production cost.

expensive smartphones

The Nexus line of products initiated by Google in partnership with other OEMs follows a different roadmap. Thus, despite being filled with cutting-edge hardware, the Nexus 5 was brought to market in November 2013 with the rather affordable off-contract price tag of 349€ (16Gb model), which is roughly half the retail price of an iPhone 5s. Google mainly managed to pull this off by stripping all superfluous hardware and software features, and focusing on ticking most boxes within a clean user experience and a well-built package. Sporting a lower spec-sheet, Motorola, then owned by Google, followed that trend with its Moto G which retailed for 169€ (8Gb model) despite being as good, if not better than most mid-range phones which would have set you back for much more than that. Although those products represent uncanny value for money and have sold reasonably well, they did not translate into commercial hits. Does that mean consumers have irrational buying behaviours or that they are merely poorly informed? Although it probably stems from both causes, this limited success may be explained by the lack of marketing power used for pushing those devices in the hands of the consumers. For instance, the Nexus phones have mainly been available on Google’s online store, only in selected countries, which goes against the old-school consumer habit to try a phone before purchasing it. Besides, in addition to minimalistic marketing campaigns by the manufacturers themselves, phone carriers have ignored these otherwise unanimously praised devices. Low off-contract price tags often implies that carrier subsidized model be unviable.

Originally, the Nexus line of product was meant to set technological standards and showcase the user experience intended by Google. Ironically, while setting almost unprecedented value for money expectations, the latest member of the Nexus family may well create a predatory barrier to entry to new low-cost manufacturers.

As of now, this new breed of top-notch affordable smartphones may well drag device prices down as long as new technologies and features implemented by other OEMs remain purely incremental, and in most cases, achievable thanks to third party apps. Google’s Nexus 5 is the evidence that building a great phone is not as expensive as it used to, and that, if it were not for humongous marketing budgets or extra-features akin to flagship devices (which may bloat the phone or enrich the user experience), every manufacturer would be able to propose premium devices for an affordable price tag, while retaining a decent commercial margin.

Given its distribution model and minimalistic conception, the Nexus line-up was conceived as niche devices, translating “less is more” both in the product and its price tag. It represents more hardware guideline material for Android OEMs than a genuine attempt from Google to substitute to them. In a world were lower prices do not necessarily translate into cumbersome user experience, consumers should see more and more affordable high-performing smartphones and will be able to assess whether the extra-features offered by “true flagships” are worth the top-up on their bill. This should however only remain true until the next technological breakthrough.