No end in Sight to Rising Smartphone Pricing

Prices are ballooning for Android phones and iPhones. The $1,000 price tag that shocked us in late 2017 when Apple unveiled the iPhone X became practically normal a year later after Samsung and Huawei followed suit.

Now, foldable phones like the Galaxy Fold and Huawei Mate X and others coming up, and 5G-ready devices, like the Galaxy S10 5G and plenty more, will soon leap into the fray for costs that well exceed $1,000.

For example, the Galaxy Fold starts at $1,980 (roughly £1,500 or AU$2,800) for the 4G version, a price that Samsung justifies by virtue of its foldable phone being a luxury device that’s also a true phone-tablet hybrid. (Samsung hasn’t shown off the Fold in person yet, apart from a presentation piece behind glass.)

The company hasn’t announced pricing for either of its 5G products, the Galaxy Fold 5G going on sale April 26, or the Galaxy S10 5G that’s is expected later this summer.

Meanwhile, Huawei’s foldable phone, the Mate X, will cost buyers 2,300 euros, or roughly $2,600. That’s high for a phone swathed in leather and sapphire crystal, and unprecedented for one made of plastic. Huawei, too, positions the foldable Mate X in this new category of hybrid devices.

Even 4G “candybar”-shaped phones in 2019 that don’t bend and don’t have 5G are seeing price inflation. The Galaxy S10 ($900) costs 20 percent more than the median price of the Galaxy S9 ($850). Likewise, the budget-minded Motorola G7 ($299) rose 20 percent from the Moto G6 ($249). Even the OnePlus 6T crept up 3.8 percent from the OnePlus 6 ($529) over the course of four months.

And that’s for the starting models. Level up your storage capacity and phones become more costly still. For example, if you want an iPhone XS ($1,000) with 512GB storage capacity, you’ll pay 35 percent more ($1,349).

While there are certain conditions nudging prices higher, this triumvirate of rising costs is making most phones explosively expensive in 2019.

New technologies and designs like foldable screens and 5G speeds are pushing prices higher in the name of advancement, but they are also positioning brands to create an ultra high-end segment that can make each sale more profitable. That’s important in a climate where phone sales are slowing, and people hold onto their devices for three years or more.

The fact that people buy increasingly costly handsets in the top tier underscores the cell phone’s importance as an everything-device for communication, work, photography and entertainment. And as processing power, camera technology, battery life and internet data speeds improve generation after generation, the value people attach to a phone is sure to swell.

“Consumers are prepared to pay a premium for a mobile phone because it is arguably the most important product in their lives,” said Ben Wood, the chief research analyst at CCS Insight.

The data from 13 phone models from 2016 to 2019 shows a pattern of sharp price hikes that we expect to heighten in 2019 and beyond (see chart below).

Rising prices aren’t unusual on their own. Faster, better components like processors and multiplying cameras cost more to make. The financial load of researching and developing new materials also gets folded into the final product.

And inflation affects the cost of goods outside of tech, too. But R&D spending and inflation don’t tell the entire story your phone’s creeping expense.

Yep, your phone costs more every year

With few exceptions, phone prices from top brands are on the rise. The uptick is immediately noticeable when comparing phone prices from today with the same model released two or in some cases, three, years ago.

Apple’s prices have risen at a steady rate for both its standard size iPhone along with the Plus and Max lines, making the iPhone XS Max a luxury spinoff. Samsung’s Galaxy S, S Plus and Note prices are swinging upward too for standard models.

Yes, the Galaxy S10E comes in at a lower $750, but the Galaxy S10 and Galaxy S10 Plus are more expensive now than their Galaxy S9 equivalents were a year ago.

We’ve seen steady escalation from OnePlus, whose price jumps up each time a new model arrives. OnePlus is currently on track for two variations per year: the OnePlus 6T launched in Oct. 2018 for $549 for the base configuration.

The OnePlus 7‘s rumored $569 price tag seems like a negligible bump, especially since it’ll still cost almost half the price of a $1,000 phone. Regardless, the cost of ownership to you is on the rise.

“As reliance on smartphones has increased drastically over a short amount of time, the increase in quality and components across the industry required to meet high performance demands has also risen,” a OnePlus representative said last August.

According to LG, “Key [pricing] factors include the cost of components, competitor pricing, carrier incentives, tariffs, etc.,” Ken Hong, LG’s senior director of global communications, said in an email. “Fact is, these input costs are rising so we’re forced to follow suit.”

Interestingly, the Pixel 2 and Pixel 2 XL cost the same as the Pixel and Pixel XL. However, Google raised the Pixel 3 price 23 percent, without adding a second camera on the back and making minimal design changes. Google has pushed up the price to match the competition.

But making phones is more expensive now, right?

Phones, like all electronics, are composed of parts sourced from various suppliers, and if the cost of those parts goes up, it’s a sure bet the cost of the phones will, too. Demand for more storage over the past few years has triggered price hikes, pushing up the cost of memory and prompting suppliers to invest in building more factories to meet the demand, according to Wood.

Adding more sophisticated cameras — like the iPhone XS’ 3D depth sensing front-facing camera — or more lenses, like the Galaxy S10 and Huawei Mate 20 Pro‘s three rear shooters or the Nokia 9 PureView’s five rear cameras, costs more too. And so do materials like bendable screens, glass or ceramic for a phone’s backing, or sturdy aerospace-grade aluminum for the frame.

You can bet that the first phone to debut a diamond glass screen or the new, smudge-resistant Vibrant Satin Corning Gorilla Glass won’t be cheap. It’s also expensive for companies like Samsung to build a whole new manufacturing process for elements like the Infinity Flex display used on the Galaxy Fold.

Yet while the cost of all these components — called the Bill of Materials, or BOM — can partially explain why high-end phones cost more each year, many experts say that phonemakers are padding their profits.

“I certainly accept that some elements of the cost came from the components and the manufacturing process… but not to that order of magnitude,” Wood said.

Carolina Milanesi, an analyst with Creative Strategies, agrees.

“There is certainly more going into these phones than ever before,” she said. “The BOM is certainly growing for these devices, but I do think that there is a premium margin applied by the brands to their flagship products because they are status symbols.”

The 5G and foldable effect

Apple and Samsung struggled with stagnant sales that dogged their 2018, but that didn’t stop Apple in particular from profiting handsomely.

In August 2018, it became a trillion dollar company, on the back of high iPhone sales margins, even as it slipped to being the third-place phonemaker behind Huawei. Whether interest continues to cool or picks up with 5G and foldable phones is something that industry-watchers keep a close eye on in 2019.

Still, the advent of 5G and foldable phone designs will likely give phone manufacturers more license to prop up costs. 5G phones require completely new technology inside the device, and phones have to be tailor-made to work with a single carrier. That’s at least until 5G networks really get off the ground. In the early days of 5G phones, prices could rise by $200 or $300 per phone, OnePlus commented in December 2018.

We’re still waiting for pricing on most of the 5G phones that have been announced so far.

“If you generate enough value [in the phone], then consumers will be ready to pay,” said Justin Denison, Samsung’s SVP of mobile, last December when Samsung first discussed its 5G phone.

Even greater burgeoning costs apply to foldable phone designs, which include the Galaxy Fold, Mate X and a rumored foldable Motorola Razr for $1,500. These phones will have bendable plastic screens that open into a larger display, like a tablet, but fold into a device around the same height and width as today’s phones (though thicker).

Compared to these $1,500 and $2,000 devices, a premium 4G phone for $1,000 seems typical. Yet mushrooming costs on the highest-end can still result in more expensive 4G phones in 2019, that don’t have 5G radios and foldable displays.

With today’s Galaxy S10, iPhone XS and Huawei Mate 20 Pro nudging prices skyward, other players have reason to follow suit. Even midtier models can get away with raising their price tags so long as the devices cost relatively less.

For example, the OnePlus 6T at $549 still costs nearly half of what you’d shell out for the Galaxy S10 Plus and iPhone XS, a relative value that many find easy enough to swallow for a “cheaper” phone with high-end parts.

According to Wood, the analyst, it all started when Apple announced the $1,000 iPhone X. “They did the whole industry a favor,” Wood said. “That gave all the other manufacturers some breathing space and I can imagine there was a certain delight in the corridors of Samsung and Huawei and others.”

Lifting the price ceiling has one other consequence. Apple and Samsung both introduced the iPhone XR and Galaxy S10E as a $750 palate-cleanser to the starting prices of the iPhone XS ($1,000) and Galaxy S10 ($900). Comparatively, $750 seems like a downright deal. Lowering the cost of entry to an “affordable flagship” is a play to keep cost-conscious buyers within the iPhone or Galaxy family, respectively.

Midrange phones are still affordable, but may not be immune

Although foldable and 5G phones are blowing buyers’ price expectations out of the water, that may not mean that the cost of every phone will rise at such sharp rates.

We continue to see fierce competition in the middle and low end where phones like the Motorola Moto G7 and E5 families turn out excellent budget handsets. Yes, the prices are rising by percentage, as with the Moto G6 to G7, but since the overall cost is still right about $300, Motorola’s move presents a much less drastic shift than on the high end. Even at that higher-end though, a $1,000 “premium phone” might still cost hundreds less than a cutting-edge 5G device, and possibly half the amount of a foldable phone.

Other brands for wallet-watchers to look for include Huawei’s Honor brand, Nokia, Xiaomi, Sony, Oppo and Asus, which help fill the gap worldwide by quietly cranking out basic, affordable phones for cost-sensitive buyers. They each make premium phones as well as midprice devices, although not every phone will be available in every market.

So while the shiniest, most powerful devices are still locked on a path to their highest prices yet, there’s still a strong demand for midrange and entry-level phones aimed at people with tighter budgets or more basic needs.

If a $1,000 phone sounds too outrageous, you may need to find beauty in a more modest phone, or get over the sticker shock and accept that the days of a $600 flagship phone are long behind us. $1,000, in fact, is becoming the new normal.