The inevitable rise in the cost of flagships – a smartphone from $ 1

Hey.

If you look back at the last five years of the development of smartphones, you can see the usual pattern in the presentation of flagships – each generation offers a processor that becomes faster and more powerful, better graphics, larger screen diagonal and quality, changes in the size of the battery and, of course, the volume of the built-in and RAM. Leaving aside the emergence of smartphones with flexible screens, they are in their own class and are just beginning to develop. In the classic sense of the flagships, we see an increase in the average cost of a smartphone, the price is growing year by year. Let’s take a look at Samsung’s Galaxy lineup to appreciate this moment. To avoid unnecessary translation of courses, I took prices in the USA as a basis, tried to focus on one operator – AT&T, but also compared prices with other operators, taking into account the average cost of the offer. Let’s take a look.

Year Basic version price, USD Comment
Galaxy S3 2012 599
Galaxy S4 2013 639
Galaxy S5 2014 649
Galaxy S6 2015 669 Two flagships, not one
Galaxy S6 EDGE 2015 779
Galaxy S7 2016 669
Galaxy S7 EDGE 2016 779
Galaxy S8 2017 749
Galaxy S8+ 2017 849
Galaxy S9 2018 719
Galaxy S9+ 2018 839
Galaxy S10 2019 899 There was also the S10e model, but this is a simplified version of the flagship
Galaxy S10+ 2019 999
Galaxy S20 2020 999 Three flagships, a family! 
Galaxy S20+ 2020 1 199
Galaxy s20 ultra 2020 1 399
Source: Mobile Research Group, AT&T data, T-Mobile, Verizon

The journey began with the flagship price of $ 599, while the model was one, only the amount of built-in memory differed, but not other characteristics. By 2015, Samsung is dividing the line into two models, a variant of the device with the EDGE prefix appears, this is an attempt to keep the price of the base model at an acceptable level. But we understand the flagship as a device that has the most advanced characteristics in its generation, that is, S6 EDGE was just such a device due to the screen. The difference in cost with the base version was $ 100, it was an experiment in the outcome of which no one could be sure. But the buyers voted with their money and chose EDGE, more than half of the sales fell on this device.

In the next generation, the layout remains the same, but starting with the S8, the S8 + model appears, the same characteristics, but a larger screen size. We again see an increase in the cost of the flagship, the price is growing. But the explosive growth in value occurs in 2019 along with the tenth generation, the cost of development and components is such that the company increases the price. There is also an orientation towards Apple, the competitor is increasing the cost of its smartphones, the demand for them remains quite noticeable, the outflow of the audience due to the price does not occur in the quantities that could be expected. Samsung also offers the S10e, which is positioned as the youngest model in the family, in fact, it is insurance if the S10 / S10 + will not be bought at such prices. But sales are going well enough, fears are not justified. The next round of growth in value in 2020, now the basic version of the flagship starts at $ 1, and the real flagship of the line is $ 000. That is, in less than ten years, the cost of the flagship has more than doubled. And it looks fantastic, since it is dictated not only by marketing, which is often referred to in discussions, the reason for the increase in cost is the cost of development, patent royalties and the need to create new technological solutions, launch them into a series. Let’s see together which technologies are driving the cost of smartphones.

The inevitable rise in the cost of flagships - a smartphone from $ 1

Patent royalties, new technological processes – how the cost of smartphones is growing

The easiest way to say is that smartphone manufacturers are very greedy guys and therefore are gradually increasing the cost of their devices. With some stretch, this can be said about Apple, since the company does not invest in the development of components, factories for their production and therefore does not incur any R&D costs; in fact, the company derives additional profit from the fact that it does not play actively in this field. For example, Samsung spends tens of billions of dollars annually in this area, which gives it an advantage in technology, and the cost of devices is lower, as well as their price to buyers. Let’s take a look at what affects the cost of a device and why it is growing year by year.

Technological process – 10 nm, 7 nm, 5 nm and so on

A modern processor is made up of billions of transistors that are placed on a small plate. A change in the technological process always leads to an improvement in energy efficiency, a decrease in heat generation, an opportunity to increase the speed of work. In 2011, component manufacturers migrated from 20 nm technology, at that time the production line paid off in 18-24 months. The advent of finFET technology has increased production and development costs, depending on the company, they range from 18 to 30 months. For chipset manufacturers with their own factories, it becomes vital to maintain profitability. And this is possible only in two aspects – to increase the load of the lines for a longer period of time in order to keep the cost of new chipsets at the level of the previous ones, or to increase the cost of the chipsets in order to have time to recoup the lines in the same period as before, and then try to move to a new level. … Ironically, this is a highly competitive market despite the fact that there are only a few players here. Each manufacturer is trying to quickly bring new technological standards to the market, since this is the most profitable segment, despite the rather limited production volume. The second disadvantage is the need for high investments in equipment, but this direction is the point of development.

A kind of compromise is a partial increase in prices for chipsets, an extension of the life cycle of lines by an average value. This avoids a sharp rise in value.

Look at the table that describes the change in the cost of developing a chipset depending on the technological process, each step leads to an increase in the cost price, and it is impossible to avoid it.

The inevitable rise in the cost of flagships - a smartphone from $ 1

The gain in processor performance in the transition from 10 nm to 7 nm is 20% at most in real applications, often these are lower numbers (let’s leave synthetic tests and their virtual parrots aside). To show and prove that there is a noticeable performance gain, you need to add more RAM, then the system starts to work noticeably better and faster. But these are not cardinal differences from one generation to another, the difference is visible between devices that are a couple of years apart (the same flagships).

It turns out that it is important for smartphone manufacturers to increase not only the characteristics of chipsets, but also the amount of RAM, this is also an important parameter.

How has the RAM in smartphones changed?

Let’s take a look at how the amount of RAM in smartphones has changed, as well as the standard amount of internal memory. This will show that, despite the decline in the cost of an individual gigabyte, the total cost of components has still grown over the years.

For simplicity, I entered the data on the plate.

Year RAM, GB Built-in memory, GB
Galaxy S3 2012 1 16 (options 32/64)
Galaxy S4 2013 2 16 (options 32/64)
Galaxy S5 2014 2 16 (option 32)
Galaxy S6 2015 3 32 (option 64/128)
Galaxy S6 EDGE 2015 3 32 (option 64/128)
Galaxy S7 2016 4 32 (option 64)
Galaxy S7 EDGE 2016 4 32 (option 64/128)
Galaxy S8 2017 4 64
Galaxy S8+ 2017 4 (6) 64 (128)
Galaxy S9 2018 4 64 (128/256)
Galaxy S9+ 2018 6 64 (128/256)
Galaxy S10 2019 8 128 (512)
Galaxy S10+ 2019 8 (12/1 TB) 128 (512 or 12/1 TB)
Galaxy S20 2020 8 128
Galaxy S20+ 2020 8 128
Galaxy s20 ultra 2020 12 128 (256 as well as 16/512)
Source: Mobile Research Group, manufacturer data

As a side note, we can mention the iPhone line, where the manufacturer is trying to save on RAM and internal memory. For example, the base iPhone 4s in 2012 had 512 MB of RAM (all iPhones had such RAM, there were no exceptions), and the storage capacity was 16 GB (later the 8 GB version appeared).

In 2017, the iPhone 8 has 2GB of RAM, and the Plus model has 3GB, which can be considered an achievement. The basic version of memory is 64 GB. It can be considered that this was a conditional parity with Android smartphones, which has been unattainable in recent years. Look at the latest generation iPhone 11 Pro, it has 4GB of RAM, 64GB of storage. This is exactly 2 times less than in the S20. And this is a significant saving for Apple, since the components are cheaper for them.

In 2012, the cost of memory in the price of the phone was lower than in 2020, there was an increase in the volume of both built-in and RAM. As memory technology has changed, it has become faster. A separate GB is cheaper, but there are more of them. Hence the inevitability of an increase in the price of the final device. Let’s take a look at the other components.

Battery

Battery capacity inevitably increased as displays got bigger and more power was required for various tasks. At the same time, he did not note in the table that not only the capacity of the batteries grew, but also the speed of their charging, the power of the chargers. Also, wireless chargers appeared in the flagships, reversible charging – all this affects the cost price. See how this component has changed.

Year Battery, mAh capacity Fast Charging / Wireless Charging
Galaxy S3 2012 2100 No no
Galaxy S4 2013 2600 No / Yes in selected markets
Galaxy S5 2014 2800 No / Yes in selected markets
Galaxy S6 2015 2550 Yes Yes
Galaxy S6 EDGE 2015 2600 Yes Yes
Galaxy S7 2016 3000 Yes Yes
Galaxy S7 EDGE 2016 3600 Yes Yes
Galaxy S8 2017 3000 Yes Yes
Galaxy S8+ 2017 3500 Yes Yes
Galaxy S9 2018 3000 Yes Yes
Galaxy S9+ 2018 3500 Yes Yes
Galaxy S10 2019 3400 Yes Yes
Galaxy S10+ 2019 4100 Yes Yes
Galaxy S20 2020 4000 Yes Yes
Galaxy S20+ 2020 4500 Yes Yes
Galaxy s20 ultra 2020 5000 Yes Yes
Source: Mobile Research Group, manufacturer data

Cameras – camera unit

The physical limitations of the smartphone body are such that in order to achieve different shots, you need to place different camera modules. So the manufacturers began to do it. Exaggerating, we can say that in 2012 the flagship had one camera, which was the best on the market. Today, this is not enough, in addition to the main camera, each flagship has auxiliary ones that expand the shooting capabilities. See how cameras have evolved.

It is interesting that the cost of cameras has not decreased (the main module has even grown in cost, it has become more complicated), but additional cameras have been added, hence the increase in cost.

In the development of new modules, manufacturers are forced to enter into alliances, for example, Sony is cooperating with Samsung, otherwise the development price becomes cosmic. The entire market benefits from this, as Sony modules eventually end up with all manufacturers.

Year Front-camera Main camera unit
Galaxy S3 2012 1.9 megapixels 8 megapixel
Galaxy S4 2013 2 megapixels 13 megapixel
Galaxy S5 2014 2 megapixels 16 megapixel
Galaxy S6 2015 5 megapixel 16 megapixel
Galaxy S6 EDGE 2015 5 megapixel 16 megapixel
Galaxy S7 2016 5 megapixel 12 megapixel
Galaxy S7 EDGE 2016 5 megapixel 12 megapixel
Galaxy S8 2017 8 megapixel
2 megapixel (retina scanner)
12 megapixel
Galaxy S8+ 2017 8 megapixel
2 megapixel (retina scanner)
12 megapixel
Galaxy S9 2018 8 megapixel
2 megapixel (retina scanner)
12 megapixel
Galaxy S9+ 2018 8 megapixel
2 megapixel (retina scanner)
12 megapixel
12 megapixel
Galaxy S10 2019 10 megapixel 12 + 12 + 16 Megapixels
Galaxy S10+ 2019 8 + 10 megapixels 12 + 12 + 16 Megapixels
Galaxy S20 2020 10 megapixel 12 + 64 + 12 Megapixels
Galaxy S20+ 2020 10 megapixel 12 + 64 + 12 + 0.3 megapixels
Galaxy s20 ultra 2020 40 megapixel 108 + 48 + 12 + 0.3 megapixels
Source: Mobile Research Group, manufacturer data

Patent royalties for 5G excluding other fees

Do you know how much a manufacturer has to pay patent holders for 5G? This is not one company, but a number of manufacturers – Qualcomm, Nokia, Ericsson, Samsung, Huawei. Each patent holder assigns a price for the use of intellectual property, for example, Qualcomm charges a minimum of $ 13 per device based on the use of their chipset. Others are not so gluttonous, but runs up to $ 22 per circle, which translates into a tangible cost (for 4G, the payments were lower, up to $ 12 for all). It is clear that some manufacturers receive additional discounts, for example, Samsung makes a discount on the production of chipsets for Qualcomm, for which they are reduced licensing fees, and the companies also offset the cost of some patents. Curiously, the number of royalties is growing every year, since patent holders often do not make smartphones, but want to get more and more money. In a declining market, the per-device payout model continues to work, but the number of devices is declining. Which, in turn, pushes companies to increase collection of payments. The same conflict between Apple and Qualcomm was connected with this, Apple did not want to pay as much as Qualcomm demanded. But without Qualcomm, Apple could not create the radio part of their devices and lost, eventually paying compensation and agreeing on Qualcomm’s terms. Without patents, without a strong negotiating position, it was pointless to get involved in this fight, since it was not enough to be a big client, it was important to have technology.

What comes next, manufacturers’ strategy

I didn’t set out to show in detail how each component will change the cost of a flagship smartphone, you can draw conclusions from the first table and calculate the exact percentage of change in the retail price. The flagships are devices with the maximum cost and the same capabilities, but they unwittingly turn into niche models, since the price has exceeded the psychological mark. The same S20 lineup shows that the Ultra is perceived as an add-on model, and the main demand is for the S20 / S20 +, which makes sense. If initially the sales of top-end devices on the market were formed by one flagship, then then there were two of them, then three, that is, they began to come out in one family. Apple will reveal a family of four models this fall, which clearly indicates further cost increases. To show a change in technology, you need to increase the value of your models, there is no other way. This is surprising for Apple, since the company does not invest in components, it uses other people’s developments. But the idea itself is clear, a further increase in opportunities, primarily technical ones, will be accompanied by an inevitable rise in prices.

Reduced sales of smartphones in the world, inflation and a global recession – all this will push the cost of flagships up (this reasoning cannot be applied to the entire smartphone market, the middle segment is becoming more affordable). Over the next couple of years, we will see that the basic models of flagships (not simplified versions like the S10e) will increase in value, their price will be in the range of $ 1 – 100. But the real flagships can easily go beyond the $ 1 mark, a similar prospect is already knocking on the door. An indirect sign of this is also the fact that Chinese manufacturers, for example, the same Xiaomi, are releasing their affordable flagships at a cost close to a thousand dollars. Components and development are too expensive to save money on. The flagship market has been reformatted and will partially shrink as new prices scare off many.

Tell us, do you buy flagships? How much are you willing to pay for them?

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