How much do you want to pay for your next smartphone or tablet? If you’re looking to cut costs, you don’t need to skimp on the specification: there’s so much more to pricing devices than what’s in the box.
Compare the Apple iPhone 5s to the Motorola Moto G. Buying Apple’s handset SIM-free in the US – we’ll stick with US dollars for now, for easier comparison with analysts’ reports – costs $649 for a 16GB model and a whopping $849 for the 64GB version. Not long after the arrival of the iPhone 5s, Google-owned Motorola released the Moto G, selling it for $179. How can two similar devices be priced so differently? Is the difference really worth a not-inconsiderable $450?
Of course, the specification matters: component breakdowns show that the iPhone’s parts are worth almost double that of the Moto G’s. Plus, there’s design and licensing to consider. But none of those bridge the gulf in pricing between such devices. Consumers need to consider how appealing the brand name is but also how well specified the device is and how much the marketing budget tops out at. Experts agree, as Gartner analyst Jon Erensen says, that the most important consideration is “what this company’s goal [is] and how they plan to make the money”.
Here, we explain what drives prices up – and down.
Component costs
Analyst firm IHS iSuppli tots up the price of components into a bill of materials (BoM), revealing how much each manufacturer spends on hardware and assembly. Battery aside, every component of the Moto G is less expensive than those in the iPhone 5s. The Moto G’s 8GB NAND flash and 1GB LPDDR2 DRAM is $6 cheaper than Apple’s 16GB and 1GB LPDDR2 combination; its respectable 1280 x 720 display is $22 cheaper than the Retina version; and the interface and sensors are almost half the price, partly due to the iPhone’s fingerprint sensor. Even the contents of the box differ – what comes with the Moto G costs Motorola $3.50, while Apple’s inclusions total $7.
All in, according to iSuppli’s preliminary estimates, the Moto G costs $109.75 for components and assembly, while the 16GB iPhone 5s racks up $198.70. However, the Moto G’s retail price is only $73 more than its physical costs, while the iPhone’s final price adds an eye-watering $450.
“The Moto G has very thin margins – thinner than we’d expect,” says iSuppli analyst Wayne Lam. “Think about it as a budget: everybody has a budget for materials, and then they add on the development [costs] and price it accordingly, with a margin built in. That’s the profitability. For Motorola, since the margin has shrunk, they’re aiming for this product to break-even.”
It’s “a little more tricky to do the design” in smaller devices such as smartphones and tablets, admits Erensen, and you may have to pay for more expensive components to fit smaller form factors, but otherwise the main difference is the radio. Most tablets don’t have 3G or 4G connectivity, and adding that bumps up the price. For the Nexus 7, mobile connectivity is available only on the more expensive 32GB version, and bumps up the price from $269 to $349. On the Apple iPad Air, iSuppli’s BoM breakdown shows the radio costs at $32, but that option adds $130 to the retail price.
In reality, connectivity costs aren’t only about the hardware. “You have to work with standards bodies in the different countries to make sure that the device is certified, and work with service providers, and go through all the testing. When you add that cellular piece, there are lots of extra steps that can add up, in addition to the hardware costs,” says Erensen. “Depending on the type, adding cellular can cost anywhere from $15-20, all the way up to $30 if you’re using the latest LTE standards.”
Moore’s law
Thanks to Moore’s law, component costs fall over time – but that doesn’t mean retail prices will. “There’s obviously cost erosion over time, most noticeably with the big-ticket items such as displays and memory – specifically flash memory and system memory,” says Lam. “For example, 16GB NAND flash storage that cost $15 two years ago costs only a fraction of that now. These types of erosion are predictable. Memory and display costs will go down over time.
“These types of manufacturing follow Moore’s law – the equipment gets better, the process gets better, the yield improves, and the costs go down,” he says. “But if you look at how those components contribute to the overall BoM, the proportion of the cost remains the same.
“Handset OEMs typically build around an unspoken BoM budget. If they’re selling a $600 phone, they know that they’re going to throw a lot of resources and cost into the display, memory and processors. That bucket of costs usually remains steady, since [OEMs] can leverage cost improvements over time. A screen that was $40 last year will stay around $40 the following year, because they’ve improved the quality or the size. That’s typically how the BoM cost evolves.”
Indeed, despite Moore’s law, tech costs don’t necessarily fall with each new version, since manufacturers add better-quality parts or new features. The iPhone’s BoM has been steadily increasing: the iPhone 3GS was $179, the iPhone 4S $188, and the iPhone 5s is $199, according to IHS iSuppli data. For example, the price of the processor has increased from $14.46 on the iPhone 3GS to $19 on the iPhone 5s.
Improving specifications can also lead to retail prices going up: the 2013 version of the Nexus 7 was $30 more than its predecessor. “With the Nexus, the new one was slightly more expensive because some of the features, plus memory and connectivity, were improved,” says IDC analyst Chrystelle Labesque. Since the margins on the Nexus are so tight, Google had to increase the price.
Next: Doubling up design
-1.jpg&w=100&c=1&s=0)
.png&w=100&c=1&s=0)
