The era of smartphone commodification has begun

The era of smartphone commodification has begun

Summary: Manufacturers used to be able to charge hundreds for a new smartphone. Now that everyone has one, prices are plummeting.

iPhone and company: a dime a dozen. (Photo: Apple)

Remember the early days of smartphones, circa 2009? Oh, how daring manufacturers were to charge steep prices (and reap tremendous profits, if they structured their carrier deals strategically; many did not) for what was poised to be the dominant technology of our time.

We all wanted one. And when demand outstrips supply in an early category, high prices can be sustained. (HTC's Touch Pro2 on Sprint in the U.S.? An eye-popping $349.99 on contract when it was introduced in September 2009. Ouch.)

We all got what we asked for, though. Manufacturers put a phone in (seemingly) everyone's pocket, and we were happier for it. But economics were bound to follow, and now that ubiquity is increasingly putting pressure on the price of a smartphone. It is a similar, though not perfectly comparable, phenomenon to the plummeting price of a laptop computer in the 1990s and 2000s.

A new Bloomberg report reveals the eroding price of the device: from $450 to $375 (off-contract) since the beginning of last year, according to IDC estimates. That drop demonstrates that the smartphone gravy train—at least with regard to the devices themselves—is coming to an end, threatening revenue (and thus profits) at every major purveyor, from Samsung and Apple on down.

Smartphones are becoming commodities. The battle for supremacy is increasingly being fought in profit margins and emerging markets. The golden goose is already in the oven and getting hot.

The impact of this on each manufacturer varies. While Bloomberg's report focuses on the trend's hit to Apple's margins, that company has demonstrated that its integrated hardware and services approach will help support it over the long term, even if it makes most of its money in hardware sales today. Not every company has been so strategic. (HTC and pre-acquisition Motorola come to mind.)

And let's be clear: smartphone sales still represent hundreds of billions of dollars in revenues worldwide. It's the trend line that's of concern.

It is clear that phonemakers must change course in the face of new market conditions; what's not clear is where to go from here. The commodification of the PC market has left few true winners—even Hewlett-Packard, formerly in the pole position in global shipments before Lenovo surpassed it, wanted out.

Will tablets and televisions grow enough to offset the weakening smartphone segment? Will these publicly-traded companies maneuver to insulate themselves from investor backlash to the unprecedented growth they experienced in the early adoption days of the smartphone? Stick around, grab some popcorn—this game is just about to get interesting.


Topics: Mobility, Smartphones

Andrew Nusca

About Andrew Nusca

Andrew Nusca is a former writer-editor for ZDNet and contributor to CNET. During his tenure, he was the editor of SmartPlanet, ZDNet's sister site about innovation.

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  • About time

    When you can get a top of the line, 16Gb, 7" tablet for $199 (I'm looking at you, Nexus 7) it boggles the mind that a similarly featured 5" smartphone is being priced at $650.00.

    The commodification of the sector is not all bad news for manufacturers, though. I can pretty much guarantee that if consumers were asked to pay $250 for a phone off contract, they'd upgrade a lot more often than they do now. You'd see a lot of people upgrading to the latest and greatest every 9 to 12 months.
    • That's because they are sold at cost, below cost, or with almost no profit.

      In addition, phones are a little more expensive to design and manufacturer due to size constraints.

      Many 7" tablets also have much smaller resolution of their screens, making those cheaper as well.
      • Nexus 7 and iPod Touch

        The Nexus 7 has a resolution of 1920 x 1200 and cost $229, much less than smartphone despite the high res screen. The iPod Touch used to cost $200 despite being the same as the iPhone except lacking cellular abilities so it can't be small size either.
  • Its interesting to see in europe for example

    where android/apple is more typically like 70%/20%, than in the US its more 40%/50% ish, I think. Because in the rest of the world the phones are not on contract and have to compete on actual price. In the US you can get pretty much any high end phone for $99-$199, so the trend is to go iPhone because its more fashionable.
    MS is going to have trouble in the coming years as they need to earn revenue from licensing the OS. Not a good business model in this day and age. This will slowly cancel out the gains in windows phone I believe. That and firefox/ubuntu/tizen OSs of which probably at least one may gain share.
    • what stops ms from borrowing the model from google?

      if they see that selling licenses isn't working out
      • So far MS has not

        figured that business model out. Bing has a far road to travel to get anywhere near where Google is today.
  • The editor must be out of this world

    Put aside carrier subsidized phones, high-end smartphones are still sold at a staggering price level. $500 upwards. Considering that by all means it's still only a phone suffering from a tiny screen the current pricetag is ridiculous. I can easily get two mid level tablets for the price of one phone !! I can even get a mid level laptop for what Apple is charging me for a fully pimped iPhone.
    I don't see any noteworthy erosion in price.
    • hopefully soon..

      yeah, maybe only the older android devices are cheap.. high end androids and iphones are still expensive.. no commodification yet..
  • I'm not saying the iphone isn't nice

    but obviously the average consumer is an uneducated sheep if they are not picking up the nexus 4 for $299-$349 off contract. (i know its not LTE though, but maybe a refresh soon will fix that) Only google is not themselves rap*ing and pillaging the consumer (they can spy on me all they want though)