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A smartphone user. (M. SPENCER GREEN/AP)
A smartphone user. (M. SPENCER GREEN/AP)

Commodity boom: The smartphone’s global price war Add to ...

Now it looks like Apple too is being forced to change its ways.

Apple is widely expected to announce a low-cost version of the popular iPhone later this year, and reports this week revealed the company has signed on with a Chinese manufacturer called Pegatron to assemble it. For years, Apple’s main assembly lines belonged to Foxconn, but Apple has turned to Pegatron to broaden its manufacturing and product lines as it pursues a lower-cost device.

But the rise of lower-priced phones all but guarantees that Apple’s once-astronomical margins will drop. Mr. Daryanani predicts a low-cost iPhone will produce margins of around 38 per cent, as opposed to roughly 50 per cent on the company’s top-end devices.

“It certainly puts downward pressure, but it keeps the growth prospects going.”

Mr. Daryanani predicts Apple will release a low-cost iPhone some time this year, perhaps lacking the flagship phone’s high-end “Retina” display and other high-end components. In addition, he says the company will need to focus on building carrier relationships with massive developing-market players such as China Mobile.

Not to be outdone, Samsung Electronics Co. Ltd. is adding more lower-cost smartphone options to its stable.

Samsung, perhaps the fastest-growing smartphone maker in the world, manufactures a high-end line of Galaxy and Note phones, which can cost upwards of $700 without a contract or $300 with a three-year contract, along with several phones at the other end of the spectrum. This week, the company launched the Galaxy Mini, a smaller and cheaper version of the flagship Galaxy S4. It’s expected to cost a few hundred dollars. The strategy is almost exactly the same as RIM's Q10 and Q5 – a high-end, high-priced phone for those who can afford it, and a low-cost version of the same device for emerging markets and price-conscious consumers.

In addition to slowing growth, high-priced smartphones are facing another challenge – the slowing upgrade curves that come when the features of new consumer electronics stop evolving substantially beyond existing models.

“There is definitely the ‘good enough’ factor that comes in any industry,” says Kunal Gupta, chief executive officer of Toronto-based mobile apps developer Polar Mobile. Mr. Kunal refers to the point when consumers are satisfied with the device they’ve purchased and see little reason to upgrade, especially at the high end of the market.

“I think that has happened in the smartphone industry.”

Indeed, some of the phones targeted at the mid- and low-end markets, such as RIM’s Q5 or Samsung's Galaxy Mini, have the kind of hardware specifications that would have made them top-end phones just a year or two ago.

The smartphone industry is facing the same kind of transformation that began wiping out margins in the desktop computer industry a decade ago. Once, desktop PCs were considered high-end devices, worth a premium price. Indeed, Apple once controlled a significant portion of the high-end desktop market, before a glut of cheap, Windows-powered computers almost drove the company out of business. However as hardware improvements hit a natural ceiling for all but the most demanding of users, desktops morphed into a commodity, and it became increasingly difficult to generate much profit off every sale. That left former tech growth titans such as Hewlett-Packard, Microsoft and Dell scrambling to find new business models in software, services and other areas to remain competitive.

“All tech industries mature eventually,” says Deloitte Canada analyst Duncan Stewart. “When they do, gross margins compress.”

Smartphone makers that have focused almost exclusively on high-margin phones are likely to keep making money in the near term. But if manufacturers such as RIM, Apple and Samsung are unable to continue upgrading their most expensive phones at a clip that differentiates them from the quickly improving low-price phones, they may soon find themselves in the same position as commodity PC makers.

“As the top-end phones hit a natural ceiling, mid-range phones are becoming 100 per cent better year over year,” Mr. Stewart says.

“Those two curves are starting to crunch into one another.”

In recent years, upgraded flagship phones from Samsung and Apple have given consumers better screen resolution, more powerful processors and better battery life. But those improvements all have a “good enough” point for many consumers. Even in developed countries, teenagers with very limited disposable income make up one of the fastest-growing segments of the market – a segment that’s much more interested in social networking features than processing power. And because social networking tools are software tools, they can be used on even the cheapest of smartphones.

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