The original iPhone cost $499 when it launched in 2003. A decade on, the cheapest iPhone of the current generation, the iPhone 8, costs $699. And while it has substantially more processing power, memory, pixels and battery capacity than its younger sibling, it isn’t anywhere near as revolutionary.
So why are prices shooting up when the technology is marginally improving?
Consider that the opposite tends to happen when new technologies become more commonplace. As the market saturates, the technology tends to become cheaper. Smartphones have followed this trend to some extent. See for example recent handsets like the Huawei Honor 8, the Xiaomi Mi A1 or the Moto G5 Plus, which provide excellent specs at affordable prices.
However, smartphone sales plateaued in 2016 according to a report by IDC, and many established manufacturers are now looking to the high end of the market to increase profits.
Smartphone giants like Samsung, Apple and Google are now pushing flagship devices to the $1,000 mark at their highest-end configurations, and have essentially created a new market category -- the “ultra-premium” smartphone -- to justify the hike.
According to a recent report from GfK, the global average sales price of a smartphone continued to increase in the third quarter of 2017, rising by a record 7% year-on-year. The report also points out that although sales figures are falling in developed markets like the U.S. and Europe, increases in average sale price (ASP) means that overall sales value has risen.
The ‘ultra-premium’ smartphone
Samsung was one of the first to explore the potential of the ultra-premium, “phablet” phone with its Galaxy Note line. The Note stood out thanks to its large screen and bundled stylus, promising to be a powerhouse of productivity. It was marketed at those who needed serious mobile power on the move, and its first iteration, released in 2011, had an MSRP of $680, making it one of the most expensive smartphones on the market. Fast-forward to 2017 and the Note 8 has an MSRP of $930 – a 36% price jump.Apple began its own ultra-premium journey around 2014 when it split the iPhone line into regular and “plus” models. The first of these, the iPhone 6 Plus, featured a camera with optical image stabilization (not available on the iPhone 6), a larger screen and a bigger battery. The iPhone 6 Plus cost $749 at its lowest storage configuration.
The company’s most recent fork introduced an even more ultra-premium flagship, the iPhone X, which brings its highest-end model up to $999 (or $1,149 for the 256GB version).
LG’s ultra-premium line was announced a year later. Unveiled in 2015, the “V” series promised to be the ultimate mobile device for video and photography. The original V10, the first in the series, cost around $699. Two years later, the V30 costs around $800.
The race for components
Besides slow growth, competition for parts is also partly responsible for this trend, according to OnePlus co-founder Carl Pei. “In the ultra-competitive smartphone industry, there are many players competing for a relatively low supply of key components,” he told Forbes. “The scarcity of components increases their cost, resulting in the increasing prices of phones, industry-wide.”An added layer of complexity is that companies need access to the best technology out there. It makes sense in the eyes of the consumer. If they’re willing to pay higher prices for premium smartphones, the expectation is they’re receiving a superior product.
“It…becomes a race for components to meet these standards,” said Pei. “For example, 2017 was the year of more immersive screens. Many brands, even globally recognized ones, have trouble securing high-quality displays.”
Google ran into the issue with the Pixel 2 XL and faced the wrath of consumers. It shipped with what some users felt was a poor display panel, which exhibited image retention, possible screen burn-in and a color shift when viewed at an angle. Not what one would expect at a price of $850 per unit. The company was forced by negative press to push out a software patch that resolved some of these issues, but Google is still "actively investigating" the problem.
The new normal
Accessories are also increasingly driving revenue for smartphone brands. Samsung, Google and Apple all have their own wireless headphone offerings, and each solution is becoming dangerously proprietary. The quick pairing on Apple’s AirPods, for example, will not work with Android devices, and Google’s Pixel Buds, which offer an innovative translation function, will only work as intended with Google’s Pixel devices.This increase in accessory costs can drive up the price of ultra-premium smartphones even further, as Thomas Ricker noted in an article for The Verge. “All in, I'd say that my desire for an expensive $999 iPhone X has resulted in nearly $2,200 spent on iPhone X related purchases.”
Although many consumers may not notice prices creeping upward thanks to fixed two-year contracts, those who buy their handsets directly will need to think long and hard about the value of their investments.
