The remarkable stability of pricing

Prices provide accurate, independent signals about where, when, and how to create and deploy value-creating innovations. The mechanism of free markets signals what should be rewarded and what shouldn’t. When comparing competitors, prices are the best indicators of differentiable positioning.

However, prices are sometimes anomalous and subject to transient market conditions. It’s therefore important to observe pricing over a long time frame.

This chart shows the average selling prices for all phones sold by the eight publicly traded phone vendors (covering approximately 70% of the market) since mid-2007.

There is remarkable stability in the pricing of the competitors. One could argue that only Motorola and LG saw significant swings in price. (Apple’s instability in 2007 was due to the revenue sharing deal for the 2G iPhone on AT&T).

Motorola pared down its portfolio (and its market share) and as a result has seen a doubling in ASP. LG had a rapid rise and rapid fall as its feature phone business boomed and busted.

But otherwise, pricing trends are subtle: down from Nokia and Samsung. Slight decrease for RIM and HTC and stable for Apple. In a future post I’ll dive into the relationship between pricing power and share.

  • James

    If Apple's ASP is around $640 and the most expensive contract iPhone is $299 on AT&T people must be buying unlocked iPhones by the boatload. Are that many people really buying unlocked devices?

    • No, what the customer pays isn't the ASP. The carrier subsidized the extra ~350 in exchange for a contract.

  • iesis

    I think in the long term, you'll see most players continuing to climb as you can see with Motorola and SE, as the unbranded masses take the bottom of the market.

    • Hamranhansenhansen

      They cannot rise, because if they do, carriers will just switch to a cheaper Android phone.

      • iesis

        And yet, there they are, Motorola and SE, rising. I think you'll see that happen with LG and Samsung too, when they finally kick out their featurephones division.

      • unhinged

        Stuff and nonsense. If consumers and/or carriers perceive value from the product, the ASP can rise – this is the basis of a market economy.

        Whether or not an increase in ASP leads to greater overall profits is dependent on volume of sales. The carriers may "switch" to cheaper phones but they're going to make their moves based on their own forecasts for maximised profits. Apple have shown that a desirable device can bring massive profits to the carrier, so it's a more complex situation than your answer implies.

    • unhinged

      I believe you are correct; however the rise in ASP will I think be linked to the proportion of smartphones in the sales mix for the manufacturer. Apple is 100% smartphone, the others are not.

      The ability of the manufacturers to differentiate their products is another strong factor.

  • Consider that most people in the US (the only market I'm really familiar with, sorry if this is too US centric, but I think the numbers are largely similar worldwide) buy any smartphone for approximately $300 with a 2-year contract which will cost approximately $80/month or $2000 over the life of the contract.

    The phone price can vary a little but not hugely, the contract price varies more, but what I'm drawing attention to is the fact that the up-front price of the phone is (a) small compared to the overall cost over the life of the contract, and (b) pretty similar for iPhone vs other smartphones.

    My question: to what extent does this inhibit market pressure to lower Apple's prices for the iPhone? Consumers don't care, since they don't see the price difference; they pay approximately the same for an iPhone or an Android phone, both up front and over the life of the device. If Apple is able to charge that much more than an Android vendor, it seems that the carrier is paying the difference, and willing to suck that up because over the life of that $2000 service contract, it's profitable for them either way.

    • Hamranhansenhansen

      You are assuming the user pays the minimum amount every month. iPhone users use their phones more and pay higher bills and the carrier ends up making more money off them.

      • drwilly

        It's not so much iPhone vs Android phones, but feature phones vs smartphones. Carriers want their feature phone customers to move up to a smartphone (with its higher monthly fee). Verizon is willing to pay the higher subsidy cost of an iPhone because iPhones will attract more feature phone customers to switch to smartphones than Android phones

      • Right. I'm just curious if this is sustainable — carrier is happy (enough) and has little leverage over Apple, users/consumers don't care because the pricing looks the same to them — they pay the same, and how the pot is divided between carrier and phone manufacturer doesn't matter to them — then there's no downward pressure on Apple's prices?

        (OK, not really *no* downward pressure, because the carriers won't pay infinitely much, but the only downward pressure comes from the carrier, who has only so much leverage and doesn't seem to mind the current situation?)

      • unhinged

        This is an exact duplicate of the situation that allowed Windows to prosper – the consumer does not see the cost difference between manufacturers until they compare a truly different product (Macintosh).

        With the iPhone, Apple have arranged a subsidy from the carriers so that the consumer perceives little or no price differential and the comparison then becomes one of the quality of the experience.

        Is it sustainable? The carriers will stick with iPhone as long as it is the most popular phone and they still make large profits on it. The challenge for an iPhone competitor is to become more popular by providing a better experience at the same price or an equal experience at a lower price. Evidence thus far indicates that this is extremely difficult. 🙂

      • I was talking about iPhone vs other smartphones — I think it's certainly true that smartphone users pay higher bills than non-smartphone users, and the carrier makes more money off them. But among smartphone users, I don't think iPhone users pay the carrier more than other smartphone (e.g. Android) users.

        I don't think most smartphone users pay more than their contract minimum — in the US at least, where data plans have been unlimited (and even AT&T's new-ish 2GB plan is more than most people use today), using the data side of your phone doesn't cost you more. Using more of voice or SMS without an unlimited plan for that will cost you more, true, but I don't think iPhone users are likely to use those services more — if anything, they use less legacy voice, and either get an SMS plan or don't use SMS.

        The above is all true of the many US iPhone users I know.

        So really, in reply to your comment:
        – yes, I'm assuming the user pays the minimum (relative to their contract) every month, but I think that's a defensible assumption in general
        – I'm assuming they have a higher minimum/contracted amount, though, relative to non-smartphone users (but roughly the same across different smartphones, i.e. iPhone/Android; do you have data that iPhone users have higher monthly bills than Android users on the same network?)
        – so yeah, iPhone users do pay more over the life of the contract and the carrier ends up making more money off them, compared to non-smartphones.
        but again my point was only about smartphones, iPhone compared to other smartphones.

    • O.C.

      2 yr contract at $80 a month. In the US maybe, but not here in the Netherlands. I bought a €400 plus phone on a 1 yr contract for €30. Monthly bill of €45 + a €5 unlimited dataplan. If that's what you guys pay in the US, you are getting seriously overcharged!!

  • In Europe the contract price usually reflects the amount of subsidy so you'd pay €10 more per month for an iPhone as opposed to a Nokia N8 and you'd probably have to pay €100-200 for the iPhone handset also whereas the N8 would be free. So, essentially you're paying the extra subsidy on the iPhone and it's transparent. Some countries legislate to make it explicitly so but essentially Europe is very competitive on both the carrier level and the handset manufacturer level.

    From what I gather in the US you pay the same no matter how expensive the handset is and the carrier pockets the difference so there's no reason to buy a cheap smartphone and the market is distorted toward expensive smartphones locking out companies like Nokia and ZTE who don't compete at the expensive end of the market.

  • When I think of Android, I think of a phone like the Nexus or the Motorola Droid, which sell for about the same as the iPhone on a two year contract.

    So when I think of the statement that Android is beating iPhone in market share, I assume that means the aggregate sales of Droids and Nexii and other similarly priced products are outselling iPhone. This makes it appear that iPhone is in mortal danger and is fighting for its life against the competition.

    But this ASP data makes it look like almost all Android phones sold are cheap featurephones and not at all at the iPhone level. This means Google is competing against Blackberry more than iPhone, which if my memory serves was in fact their original business plan. It means iPhone is still winning at the top of the market, which means that, really, Apple is in little no competitive danger.

    Am I reading the data correctly? What are your thoughts?


    • Hamranhansenhansen

      Droid and Nexus are the exceptions, not the rule. They are around because 3 of the 4 big US carriers did not have an iPhone, so they needed "high end" Android phones to sell to customers as being "just like an iPhone." This created a myth that iPhone and Android compete. Android is purely low end where Apple does not even play. The vast majority of Android phones are absolutely great feature phone replacements. The phone is still poorly designed and built and basically disposable, but at least it has a touchscreen and Wi-Fi and a real HTML5 Web browser and H.264 video decoder, and at least it is cheap.

      And a lot of the Android figures are inflated. They include other operating systems that are also based on the Google Android open source project. That is as dishonest as if iPhone numbers included other operating systems that are also based on the Apple WebKit open source project.

      • aso

        I think you've confused your criteria as to what a smart phone is. Having an Apple logo on it, isn't part of it.

    • arvleo

      In addition to Hamranhansenhansen reply, You also have to consider that the ASP shown here is calculated over all phones(android + feature phones + low end phones) sold by the company and not only smartphones (Apple of course sells only iPhone). The average ASP of companies would most definitely rise if we consider only android phone sales.

    • It depends on what you think is the baseline. If you think that $700 is the baseline price for a real smartphone and $300 is the baseline price for a feature phone, then iPhone is alone at the smartphone level and Android phones are clustered at the feature phone price. If you think that $100 is a baseline price for a feature phone and $300 is baseline price for a smartphone, then the Android phones are clustered around baseline feature price and Apple is managing to charge a lot more and get away with it because people like the phone so much.

      I think the baseline price for a smartphone should be considered closer to the $300 mark than $700 — Apple's clearly able to charge a premium for the iPhone because people want it and the carriers are still making money so the economics work out; I'm pretty sure they could profitably charge far less. Evidence for this — the contemporary Android phones pack in similar hardware and at least some of the vendors seem to be selling them at a profit for far less; also if you look at the iPhone siblings (iPod Touch has similar hardware starting at $200, iPad has much bigger and more expensive screen and still manages to come in at $500) you'd think Apple could profitably sell iPhone for $300-$400. If they had to, which they clearly don't today.

      (See my post above for an argument that the carrier subsidy system, in the US at least, hides the true price of the phone and thus prevents downward price pressure on Apple.)

  • Dan

    Also, don't forget that many of the carriers sell Android phones as BOGO (buy one, get one free), which means that the Android gets to claim two phone sales, and the carrier eats the cost of the second phone entirely. Google and Android go out of their way to falsely compare their phones with iPhone, but I don't see any carrier offering iPhones as BOGO (not yet anyhow).

    • If you look at the ASP of Android phones, the handsets cost less than an iPhone yet you're still paying the same monthly tariff in the US. So, a) the carrier is making more off you than an iPhone and b) the second 'free' phone' is probably paid for from the subsidy in the tariff anyway.

      BOGOF offers are unheard of outside the USA for phones btw so it's only a small percentage of sales.

    • Only a small percentage of BOGO offers result in the sale of two phones. Since it requires an new activation with 2 year contract most people aren't in the position to take advantage of it, especially current customers. It's more of a tool to attract new customers.

      • asymco

        Very interesting and very compelling. This explains why we don't see much of a BOGO effect in pricing or margins.

  • jago

    Horace, do you use the same exchange rate in all quarters for vendors not reporting in dollars, or take into account currency fluctuations over time?

    • asymco

      For companies which report their figures in local currencies (e.g. Nokia, Samsung, LG, HTC) I look up the conversion rate and use an average over the reporting period. I maintain the data in USD.

  • unhinged

    "Prices provide accurate, independent signals about where, when, and how to create and deploy value-creating innovations. The mechanism of free markets signals what should be rewarded and what shouldn’t."

    Horace, could you please expand on this? I do not understand what signals are being generated and I _definitely_ don't understand the meaning you ascribe. How, for example, did Apple know that the phone market was ripe for the picking? Was it mostly due to the prices and subsidy structure?

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