Zara’s Space on the Web – Musings

August 30, 2013

Why are smartphones so expensive? (and why they’re about to get a lot cheaper)

About 3 years ago I finally gave up carrying a Nokia-brick equivalent around and acquired my first smartphone, the Samsung Galaxy S1.  3 years later and it’s pretty much asking me to put it out of its misery.

So I’ve been looking around and considering my options.  The new Samsung Galaxy (the S4) 16GB will set me back about £500 from a reputable store (and there are many fakes going around, so you want that reputable store),  and lets just set that as the benchmark as I’m sure the iPhone 5 is more expensive and I think the HTC One is too.  That’s a lot of money for a jobless person, but luckily I have much cheaper options.

For instance, picking up a 7 inch tablet instead, such as (to stick to Samsung for a fair price comparison) the Samsung Galaxy Tab 3 16gb which ALSO MAKES PHONE CALLS and retails for £310.

In other words, the  Samsung Galaxy Tab 3 is a 7 inch smartphone which is 65% the cost of it’s 5 inch counterpart.  Which one might consider a bit strange, seeing as it has 2 inches more display, albeit probably slightly crappier specs than the phone, including a non super-amoled screen and crappier cameras.

But then again we might imagine that miniaturization costs more, hence why the 5 inch phone is more expensive than the 7 inch tablet.  But then… if that’s so how come the Samsung Note II costs more than the normal sized phones?

So not knowing much about the cost of parts and miniaturization and random technologies here’s my take on what’s going on here.

  • The cost of the highest end smartphones have always been high (some say the costs of them are coming down but the S4 costs today what my S1 cost 3 years ago).  Similarly, when the first tablets came out, they were also very costly.
  • Then in the middle of 2012 Google came along and crushed the market* with the very affordable Nexus 7 at £160 for an 8gb and £199 for the 16gb.  To put this in context the iPad 2, which had already been succeeded by the iPad 3 was still retailing for £329 without 3G (these are prices I pulled off an email discussion with my sisters talking about which tablet to get my Dad for his birthday)!  This instantly made tablets a lot more affordable while installing an ‘anchor’ price on 7 inch tablets.  Competitors had to stick to the general area of this price or customers would just not give their product a second glance.
  • So now we have very expensive smartphones** and very cheap tablets.  While before there was some overlap between the markets, they were pretty much separate markets, so it was okay.  But now tablets have the ability to make phonecalls… which I foresee many customers whose phones have come to the end of their lifespan (such as myself) switching to the 7 (or 8, thank you Samsung) inch tablets (and a bluetooth headset) instead of getting a much more expensive smartphone.

This means that the smartphone market will start experiencing a high customer dropout which means that demand will fall which means… in about a year or two our smartphone prices will drop to tablet prices or even lower.

That’s my guess anyway.  And why I’m going to be trying to prolong the lifespan of my already tortured S1.

*How did Google make such a low cost tablet? Well I’m guessing there was some economy of scale/using lower specs but mostly they just sold it pretty much at cost.  Now why they did that is another topic for discussion… but I’m willing to bet it has something to do with taking tablet market share from Apple. This guy’s theory sounds good, anyway.

**So following on from the above asterisk, yes, smartphones are probably so expensive because you, or enough people, are willing to pay them that much, and therefore manufacturers are probably making pretty large profits off of them.

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Oh are you still reading?  I also want to say something real quick about customer differentiation! That’s what companies do when they’re trying to get the most money out of each customer.  As you know, everybody has different preferences and also different willingness to pay for things.  So say someone with a lot of money is willing to pay a lot for the highest end product because it looks good and probably functions pretty well.  Someone with less money is probably going to spend a lot more time researching their options and weighing up what they get versus what they pay.

So I’m thinking the technology companies have done something like this.

  1.  Rich customer/customer who cares a lot about their tech/Customer who wants to look hip with the latest high-end tech – High-end smartphone AND high-end tablet (costs lot, big margins)
  2. Poorer customer who just wants a smartphone or tablet – low-cost smartphone OR low cost tablet (pretty cheap, small margins)
  3. Savvy customer who’s chosen what’s best for their (bigger) budget – High-end smartphone
  4. Savvy poorer customer who’s chosen what’s best for their (smaller) budget – Low-end phone tablet

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