Have Flagship Smartphone Prices Peaked?

Smartphone makers have been testing the economic rule of supply and demand for the past decade, seemingly defying conventional wisdom in consumer electronics products by raising prices. Greater utility and the constant of use smartphones combined to grow the value of devices to customers. But it seems that top phone-makers are learning that no tree grows to heaven, as prices beyond the psychological threshold of $1,000 have created sticker shock among some consumers.

Apple’s announcement of the iPhone 11 at its annual product event last week largely centered on incremental improvements such as better camera and battery life, but the company’s decision to lower the price of its base flagship smartphone caught our eye (see Instant Insight: Apple Unveils New Hardware, Competitive Subscription Services). The iPhone 11 will cost $699 in the US. A year ago, Apple introduced the iPhone XR at $749. It’s a subtle, but interesting move that sees Apple shifting its “mid-range” iPhone back to a price of $699, where it previously resided with the iPhone 8.

Apple’s decision to lower pricing can be seen as an acknowledgement that it has tested the upper limits of consumer acceptance. At a time when the company wants to expand its number of customers as it builds out its ecosystem of content and services, it’s sensible that it slightly brought down the barriers for consumers to get their hands on the new device.

Apple rivals, primarily Samsung, will be watching this development closely, and may need to also revisit their approach to pricing. Its base flagship model, the Galaxy S10e, is priced at $750. Samsung has been in the orbit of Apple, affected by the pull of its gravity, allowing it to quietly raise prices as well.

In light of Apple’s pricing announcement, there’s little doubt that Samsung, along with Google, Huawei, LG and other flagship brands, will need to look at their numbers again, examining component prices and margins.

Google, as it prepares to launch its next-generation Pixel phones in October 2019, is first in line. Attention will be on device pricing just as much as specifications. And Samsung, which plans to bring out its Galaxy S11 series in March 2020, must also be evaluating its device pricing strategy. Some smartphones, however, are clearly outliers, such as Samsung’s Galaxy Fold, which has been positioned with ultra-premium pricing thanks to its innovative (and expensive) technology.

But when it comes to pricing of mainstream devices, Samsung itself is contributing to the tone here. Its approach of releasing mid-priced, A-series devices that deliver attractive features as well as value for money is likely to have contributed to Apple’s decision.

That said, we believe that Apple is still its own biggest rival, particularly as dedicated Apple users are holding onto their phones much longer than they have in the past. This is especially true in the US, where carriers stopped subsidizing phones. The subsidy model made a $650 smartphone appear to cost $200. Now, anyone looking to upgrade their flagship phone is faced with a price of between $750 and $1,000 or even more. It’s little surprise that Apple and others are also promoting attractive trade-in programmes to help offset the cost of a brand new device and encourage upgrade sales.

Phone-makers know that the upgrade cycle is stretching out: people are keeping their smartphones longer than ever, as new phones bring marginal upgrades to features and increasing prices. There are tens of millions of dedicated iPhone users with devices that are more than four years old. The fleet is aging and many of these older devices can’t handle the latest services. For many, the iPhone 11 will be an attractive option, but so will the iPhone XR and other previous-generation devices whose prices have come down as well.

Smartphone prices have reached levels few had predicted, but as much as people love their phones, fundamental economic rules do matter. Price elasticity seems to have kicked in and it will be interesting to see if prices have peaked indefinitely.