Is the smartphone a commodity?

People throw around the idea of things being or becoming “commodities” but there is little clarity about what “commodity” status implies.

If you look up the word, it has nothing to do with technology or innovation. In economics, a commodity is something that is substitutable (fungible) and roughly equal to competing versions of the same thing. A mineral good (oil) or agricultural product (pork bellies) is roughly of equal value regardless of where it comes from or who produces it. Commodities also have very liquid markets and are therefore easily priced according to demand.

Commodities have a “fixed” quality which cannot be and most likely never was improved. It’s a product that is essentially frozen in terms of innovation.

But in technology and especially in terms of complex, rapidly improving and evolving products with uneven distribution a commodity is not easy to identify and there can be a lot of arguing about what is and isn’t.

So here is another way to define it:

In terms of innovation, a product can be defined as a commodity if it reaches a point where improvements do not create additional value. As the product gets better, it reaches a point where customers can no longer absorb the improvements and therefore they become unwilling to pay for them. Thus the price of the product cannot be increased or maintained in the face of competition.

In other words, you can’t get a premium price for a better product.

If you can’t improve the product, one consequence is that you can no longer differentiate it. Becoming commoditized is a natural result of the improvement of a product beyond the customer’s ability to utilize that progress.

So we’re back to the debate about whether a product is good enough. You can argue that commodity status is that point where it over-shoots the market. Before that point is reached the product can obtain a price premium for technology innovation. After that point, the product becomes a “commodity”.

How does this relate to the mobile market today? Again, it’s important to ask what is the basis of competition. Is hardware not good enough? Is software? Or is the whole widget?

For those who say that smartphones are commodities, they have to also account for the inevitable consequence: that improvements will not be valued and hence will not be implemented. It also means that profits will evaporate from the current incumbents to new models of profit capture.

This is the essential argument for Android. But I’m still struggling with what the argument implies. That the product as it exists today is all that will ever exist.