$1000 No Longer a Barrier for Smartphone Adoption
A few years ago, expecting mainstream consumers to spend a thousand dollars on a phone would have seemed unlikely. But the barrier is broken now. iPhone X, which helped Apple achieve its revenue super cycle in Q2 2018, has been surpassed by the new iPhone XS and XS Max, which have reset the pricing high-water mark.
The more expensive iPhones represent an opportunity for other OEMs to launch their flagships at increased prices while still providing a high-value proposition at a lower price point than Apple. This is, at least partially, the reason we have seen 2018 flagship launches from key Android OEMs like Samsung, Huawei, OPPO, Vivo, OnePlus at a higher price than their previous flagships; there is also a material cost in, for example, increased memory.
Exhibit 1: Increasing launch prices of flagship devices (most expensive variants prices in USD)
Smartphones are central to people’s lives. For many, their smartphone is the last thing they look at before sleeping and the first thing they look at on waking. And during the day, it is rarely more than an arm’s length away. A smartphone is also a personal statement that expresses the user’s personality in the same way that some people do with clothes or their car. Considering the role a phone plays, perhaps paying more than 1000 USD doesn’t seem so much.
The quality of devices themselves is also improving. The new iPhone models are IP68 compliant — the highest rating for water and dust resistance. iPhone 7 (and up to iPhone X) was ‘only’ IP67 compliant and earlier iPhones had no water or dust resistance. As moisture damage is the second most common reason for reducing the value of a product after broken displays, this is important. It means products are better able to withstand the rigors of everyday life, last longer and sustain their value.
These factors are helping consumers to hold on to their phones for longer periods, lengthening the upgrade cycle and thereby causing overall market growth to slow or even contract. OEMs are keen to maintain or even increase the replacement rate. They are therefore promoting trade ins, upgrade programs (Apple Upgrade), EMI and other incentives. If successful, they can sell more, new devices and are able to extract further value from the used handset.
And the residual value is important for both the industry and the consumer. As we have seen in our refurbished handset studies, the value of a high-grade second-hand phone (especially iPhone) is considerable. Consumers can buy and use a 1000 USD iPhone for a year and then sell it back to the trade for 60 to 70 percent of its original cost. The real cost of ownership therefore, is less than original ticket price suggests.
