A Grand Vision

Will the $1,000 Smartphone Become the Norm?

Head over to Apple’s US online store and start piecing together an iPhone. Select the Plus variant of the device with 256GB of on-board storage and you’re on the border of $1,000. Throw in sales tax and you breach a grand.

This reminds us that the trend in phone pricing runs counter to that found in other segments of the consumer electronics industry. The correlation between pricing and feature set tends to be inverse with devices such as televisions and computers, which get crisper and more potent while usually coming down in price.

There’s something different with flagship smartphones. Top-name manufacturers have successfully prevented price erosion by marketing incremental improvements as must-have features. They are also helped by wireless operators that are eager to place top-notch devices into the hands of their customers.

For several years the retail price floor for flagship handsets settled in at $650. Apple set the standard and other smartphone makers such as Samsung built their phones up to that level instead of competing on price. The classic economic law of price elasticity does apply here. When Google launched its Pixel phone in 2016, the company seemingly engineered the product to reach a starting price of $650 to assure consumers that it was every bit as good as the latest iPhone.

Many wireless operators still embed the cost of a phone into their customers’ monthly bills. It’s a way to spread out the sticker shock of device prices and also a method of preventing churn. In most markets, devices are “set free” after 24 months, meaning they can be unlocked and carried on. In US dollar terms, the cost of a $650 handset breaks into 24 chunks of $27 dollars. At $1,000, a two-year financing deal without any particular promotion would result in a monthly charge of $42.

Although rather simplistic, here is one way to look at the economics of the new pricing: the near 50 percent price hike from about $650 to about $1,000 corresponds to the extension of replacement cycles from two to three years. The wireless market had settled into the 24-month rhythm as subscribers and operators became conditioned to the pace. But we’ve noted that consumers are waking up to the real value of smartphones as costs are no longer camouflaged by service pricing. Particularly in the US, there’s more clarity than ever. Consumers hold on to their devices for longer and the 24-month cycle is long gone.

Wireless operators could begin to divide by 36, that is, to elongate the financing deal. For a device costing $1,000, this would again mean monthly payments of about $27 — taking it to the same level as when a $650 phone is split into 24 monthly payments. It would also help operators slow churn, although they face the risk of collecting back a device with limited residual value late in the contract if a subscriber decides to leave.

Stories that the next iPhone iteration will push pricing to new levels are not surprising. The top-level builds of these devices have been reaching new heights. The high-specification version of the Samsung Note7 was selling for about $880 and the Google Pixel XL retails for up to $870. Furthermore, consumers are settling into the concept of having larger devices, particularly as bezels fade to nothing. Six-inch displays have become the new 5.5, which has been replacing 5.2. This trend comes at a time when component suppliers are enjoying greater pricing power than they have in many years.

Nonetheless, $1,000 is a lot of money for a product that many people seemingly got for free not too long ago, but subscribers are doing the maths. About 16 hours per day, multiplied by 365 days per year, multiplied by three years comes to almost 18,000 hours of use. It’s pennies per hour, even for a $1,000 phone.

Undoubtedly operators will adjust their financing models, finding advantages in new pricing levels. It will take some fresh thinking, but there are solutions to the 1K problem coming in 2017 and the insatiable desire of many consumers for the latest and greatest smartphone is likely to continue.