Smartphones at a Pricing Crossroads

The pandemic creates a mid-tier opportunity for 5G devices

In 2019, we wrote about the effects of the rising prices of flagship smartphones, particularly as full retail prices hit a psychological threshold of $1,000. At the time, we wondered if smartphone prices had hit a high water mark despite the growing utility of the latest flagships (see Have Flagship Smartphone Prices Peaked?). And when Apple released the iPhone 11 at a lower price than its predecessor, we became convinced that consumer behaviour had successfully sent a signal back to manufacturers.

Smartphone sales had already been slowing during the past few years as mobile subscribers in advanced markets have been holding on to their devices for longer — a result of market saturation and incremental feature upgrades. Now, the Covid-19 crisis has us thinking about the need for pandemic-level pricing.

There’s temporary but painful incongruity that the industry must deal with: one of the greatest and most expensive upgrades in mobile technology is taking place at a time of social upheaval and economic uncertainty. Smartphone makers have been encouraged by operators and component manufacturers to accelerate the roll-out of 5G smartphones to enable subscribers to take advantage of next-generation networks. But they suddenly find themselves in an environment of shop closures, social distancing and personal financial uncertainty. With unemployment rates in many countries already at lifetime highs, subscribers will squeeze a bit more life out of their smartphones.

Smartphone prices had already been straining at the $1,000 level, which delivered some manufacturers higher margins and average selling prices. But we believe major phone-makers are now actively making adjustments to their product portfolios to bring lower-priced devices with ever-improving specifications to spur sales.

However, customers in many countries have been living under quarantine-like conditions, using desktops and laptops for productivity and video calls, gaming devices for entertainment and larger screens for streaming services. So, the immediate need for the most advanced smartphones has arguably waned. The question is how long this hiatus will last: demand in China and India appears to be bouncing back swiftly, but we expect the premium tier to take an inevitable hit in the second half of 2020 and into 2021.

There’s little doubt that Apple was fortunate with the timing of its recent launch of the $399 iPhone SE 2020 edition. Intended to entice older iPhone users to upgrade and to counter the mid-tier movement of Samsung, the new iPhone SE has also arrived at a time when it’s harder than ever for consumers to justify splashing out $1,000 or more on an iPhone.

We believe the media and investor narrative would have been very different if Apple had announced the new iPhone SE in a “normal” climate. Apple would have risked being accused of undermining its premium products, particularly as the new model costs $700 less than an iPhone 11 Pro Max — it really is a more affordable iPhone for many. It’s worth nothing that the delta between the original iPhone SE and the flagship iPhone 6s Plus was $450. That said, we believe Apple may be able to buck the broader industry trend toward mid-range devices when it launches its new flagship iPhones, which will be 5G-enabled, in September or October 2020.

But as we slide into a post-Covid-19 world, the state of economy will be uncertain, and paying $1,000 for a smartphone will continue to be a luxury. We expect many consumers to delay or skip a purchase or choose a more inexpensive model. The mobile industry is eager to get highly capable 5G phones in the hands of subscribers, but it will have to get prices of mainstream devices down to more comfortable levels.

This isn’t far-fetched: the global smartphone market will shrink by 10% in 2020, the competition between manufacturers will be fierce, and pricing will be the main weapon in their arsenal. With prices for 5G devices already hurtling below the $500 threshold, this seems to be a new reality (see The 5G Show Goes On). The timing of mid-tier 5G chipsets from MediaTek and Qualcomm is extremely favourable and will give rise to a wave of more-affordable devices below the $400 mark.

These are unquestionably challenging times that will create structural and permanent change in countless different ways. There’s no doubt the rise of the mid-tier 5G device will be a trend post-Covid-19.