"Cheap" is just another soon-to-be irrelevant feature

By Nathaniel Mott , written on January 25, 2013

From The News Desk

The smartphone market tends to homogenize quickly. Apple and the iPhone led the pack with a capacitive touch-screen, which was quickly adopted by, you know, everyone. HTC brought LTE-capable smartphones to the US, now a standard feature. Motorola pushed the limits of how large smartphones can be, kickstarting the rise of "phablets." Now most of the industry is producing cheap phones that might allow them to dominate emerging markets.

Call it common sense, call it copying, call it a byproduct of our mass-produced consumer society -- these are noticeable trends that echo through the industry. Every time a feature has become standard to most devices, as with each of the examples listed above, companies move on to the next gimmick, and the war towards "cheap" may be nearing its end.

Both Apple and Samsung, the leading smartphone manufacturers, mention these price wars in their quarterly results. Apple takes a typical holier-than-thou tone (well, as much as any company can adopt a tone in documents clouded by legalese), saying that it focuses on "bringing the best user experience to its customers through its innovative hardware, software, peripherals, and services," while mentioning "aggressive competition" borne from "aggressive pricing."

Read another way: We're the market leader in terms of innovation, polish, and commitment to quality, but other companies compete by racing to the bottom of the pricing barrel.

Samsung, on the other hand, cites emerging markets and cheaper devices as a sound counterpoint to developed markets' post-holiday slump. The company says that emerging markets will "see their markets escalate with the introduction of more affordable smartphones and a bigger appetite for tablet PCs throughout the year." Still, Samsung believes that "the furious growth spurt seen in the global smartphone market last year is expected to be pacified by intensifying price competition compounded by a slew of new products."

Read another way: Our race to build and ship cheaper smartphones for emerging markets will help us survive the slump caused by developed markets' holiday binge, but we recognize that the global market can only accept so many cheap devices before it also cools.

Another company knows the perils of the emerging market all-too-well: Nokia. The Finnish smartphone maker was reportedly doing well in emerging markets, mainly due to its Asha product line, which outsold the Lumia line two-to-one, but its quarterly results tell a different story.

Nokia's sales in Greater China took a massive 69 percent hit compared to the year-ago quarter. The Middle East and Africa region saw a 16 percent hit as well; sales in Asia-Pacific and Latin America fell by 17 and 10 percent, respectively. Cheap wasn't the savior some thought it may have been.

Apple and Samsung's sales improved in each region during the same period. Some of this can be pinned to low-range devices, in Samsung's case, or falling prices of the iPhone 4 and 4S, in Apple's, but it likely had more to do with the rise of both company's brands around the world.

The "cheap" argument doesn't work stateside, either. I tackled this issue in a previous post, arguing that Android's breadth and manufacturers' ability to use the operating system as they see fit won't edge Apple out of the market. Despite falling income in the US, iPhone activations have seen a steady increase year-over-year. From that post:

And hey, incomes are falling. Check out this graph, from Pew:

Screen Shot 2013-01-22 at 4.26.48 PM

That’s the median household income in the US. It’s going down, down, down, and has been since the iPhone’s introduction. Android has skyrocketed despite this fall, so the first part of Biddle’s argument is sound. But here’s iPhone activations across all carriers, as compiled by analyst Horace Dediu:


Like Android, iOS has continued to sell more devices despite the falling median household income.

Still, the argument could have been made that Android activations could also have increased, limiting the iPhone's market share despite increased activations. Now that Verizon and AT&T have opened their kimonos (, offered more data), though, we now know that this isn't the case.

The iPhone line (which includes the 4, 4S, and 5) accounted for some 63 percent of activations on Verizon's network during Q4 2012. It grabbed 81 percent of activations on AT&T's network for the same time period. So, by activation, here's what that looks like on the US' two largest carriers:

Verizon says that roughly half of its iPhone activations were compatible with its 4G LTE network, indicating that the iPhone 5 sold about as much as its older, cheaper models combined.

Again, cheap doesn't always win.

Nokia can help show this principle again. Despite its decline in emerging markets, the company reported a 40 percent increase in US sales for the fourth quarter. Even though Nokia's Lumia line isn't anywhere near as popular as Apple's iPhones or Samsung's Galaxy line, the increase in sales shows that, again, the quality phone is beating the cheap-o device.

None of this is to say that there is something inherently wrong with low-cost devices. Amazon's Kindle devices are much-loved, both despite and because of, Amazon's willingness to practically give the things away. Google's Nexus 7 and Nexus 10 tablets are both cheaper than the equivalent iPad models, and both (especially the 7) are fine devices. Lower prices allow people who might not otherwise be able to afford to embrace modern technologies to get in on the action -- though that service might be provided by the library of the future, as well.

The problem with cutting a device's cost only becomes clear when the device suffers for it.  We saw this with netbooks -- despite an early appeal, the low-cost, shitty computers are now extinct. Customers can vote even with a nearly-empty wallet, and they voted the pieces of junk off the island.

Farhad Manjoo theorizes at Slate that Apple is responsible for the netbook's demise, killing the category with its iPad and MacBook Air products. The Cupertino-based company decided not to enter the netbook market and build sub-par products out of principle and, years later, has been proven right. It wouldn't be a surprise to see the same thing happen with the rush to low-cost smartphones.

Going cheap isn't a guarantee of success. Targeting the emerging market makes sense on paper -- who wouldn't want to get in on the ground floor of a technological revolution? -- but, at least in practice, the high-end, premium experience isn't dead. It's preferred, actually, and that's not going to change, no matter how many dollars get knocked off the sale price.

Even if consumers do start to favor cheaper, low-to-mid range devices, one has to wonder if it will even matter. Smartphones tend to fall into price brackets, especially if they're subsidized by a carrier. The cost difference between purchasing a Windows Phone and an iPhone or an Android phone, assuming each of the devices is new and "high-end," is typically zero. Cost ceases to be a factor.

It isn't hard to imagine the same thing happening with un-subsidized phones. The prices are already similar -- not as similar as identical, subsidized models, but typically within the same ballpark. If everything's "cheap" and heading to the lowest possible price, eventually price stops being a concern in that scenario as well.

Smartphones have touch-screens. Many are able to utilize LTE networks. An increasing number are growing to massive sizes. Eventually, each of these features stops becoming a stand-out, "hey did you hear" hook and becomes a typical, standard aspect of every device on the market. "Cheap" will probably go the same way.

[Illustration by Hallie Bateman]