Premium phone price rise well ahead of inflation

This year a lot of people will pay NZ$2000 or more for a phone.

Apple set the tone at the end of last year with an NZ$2100 iPhone X. Now Samsung has joined the party with an NZ$2000 Galaxy Note 9.

You can pay less. A basic iPhone X with 64GB of storage costs NZ$1800. The more expensive model has 256GB.

Samsung has an NZ$1700 Galaxy Note 9 with 128GB of storage. The NZ$2000 model comes with 512GB.

Whether you need that much storage when cloud storage is plentiful and mobile data is cheaper is beside the point.

Inflationary

These are two examples of how New Zealand’s Consumer Price Index or CPI is the nearest thing to an official measure of inflation. In the most recent year, it was 1.5 percent.

That means consumers paid 1.5 percent more for a typical basket of goods and services in the year to June 2018 than a year earlier.

Expensive

At NZ$1700, the Samsung Galaxy Note 9 is $100 more than last year’s Note 8. That’s 6.25 percent higher: more than four times the CPI increase.

Apple’s iPhone X doesn’t have a year earlier model to compare.

Instead, we’ll look at the iPhone 7 and iPhone 8. When it launched the iPhone 7 was NZ$1200. A year later the iPhone 8 went on sale at $1250.

That’s a four percent increase. Apple’s markup is smaller than Samsung’s, but still well ahead of the CPI.

Everyone is at it

It’s not only Samsung and Apple. The prices of Huawei phone models climbed over the years.

Even Oppo, where the phone’s low price is the most important feature, has increased prices.

If anything, Huawei and Oppo’s price increases have been steeper than Samsung and Apple’s because they come off a lower base price.

But don’t phones get better

You might argue that the newer phones are better so phone makers can expect to sell them for more money. There’s something in this, see below.

Phone prices were stable during for years while annual upgrades meant huge leaps in functionality. Today’s upgrades are incremental while prices leap.

Apple shows the way

Apple has always lead the way on phone prices. It’s no accident it is the world’s biggest company and enjoys large profit margins. That trillion dollar valuation didn’t come by chance.

When it launched the iPhone X last year, Apple showed it could push phone prices above the NZ$2000 mark without denting sales. That opened the door for its rivals to charge more. They won’t admit it in public, but the iPhone acts as their benchmark.

Apple sells fewer phones than Samsung or Huawei.

The iPhone makes up around 20 percent of the handset market worldwide. It accounts for around 80 percent of profits from phone sales. Almost all the remaining profit from phone sales goes to Samsung.

Profits

It’s not clear how profitable the other main phone brands are. It’s not even clear if they are profitable. The companies don’t break out figures in the way that Apple and Samsung do. Yet it’s clear they are not making big margins.

Until a couple of years ago the Android phone market taken as a whole ran at a loss.

Things have changed. In part that’s because phone makers have pushed up handset prices ahead of inflation. It helps that some of the big names have either gone to the wall or wound down their operations.

Price rises have two sides

Inside the phone business, people talk about the average selling price or ASP.

According to IDC’s Worldwide Quarterly Mobile Phone Tracker:

…”climbing ASPs continue to dampen the growth of the overall market”

…”Consumers remain willing to pay more for premium offerings in numerous markets and they now expect their device to outlast and outperform previous generations of that device which cost considerably less a few years ago.

IDC says worldwide phone ASPs are up 10 percent in the last year.

Sharper prices lower down the market

Phone makers love to tell investors they have managed to increase the average selling price of their phones.

In some cases, they have done this by bumping up prices on their flagship models while fighting tooth and nail further down the market.

You can still get bargains. Spend NZ$500 to NZ$600 and you can end up with something great. It won’t have the latest camera or tonnes of storage, but not everyone needs those features.

High prices could be here to stay

New flagship phones are expensive to make, but the cost of building a phone is a fraction of the selling price.

Putting more lenses and more camera sensors may cost a phone maker a dozen or so dollars. OLED displays, curved glass add to costs. Perhaps the biggest extra cost is the memory chips needed to boost a phone’s storage, there is a trend towards higher storage in phones.

Higher phone prices are unlikely to go away soon. The glory days of fast rising phone sales are over.

People are now holding on to phones for longer, squeezing more value from the money they have already spent. So it becomes important for each sold phone to contribute a little more profit.