Friday, April 12, 2013

Smartphone prices

Hi guys,
Can anybody tell me why a smartphone costs $500, while a 7-inch tablet with the same capabilities costs $200? I find it difficult to believe that building in the voice-capability is that costly...
(Granted, $200 tablets are selling at cost, but then they are also over four times bigger.)
Is it just the usual that so long as the public are used to a certain price area for a product, they'll keep charging that price, or is there more to it?


Bert said...

Since when does the cost have anything to do with the selling price?

The price is determined solely as whatever the market will bear, i.e. the more desirable the product is in the eye of the potential buyer, the higher the price can soar...

And, no, 200$ tablets aren't selling at cost. It's 500$ tablets that have insane profit margins. Wasn't true when the technology (mainly the display) hadn't yet matured, but every aspect of it is well under control now. Makes a world of difference in electronics.

Anonymous said...

Since when does the cost have anything to do with the selling price?

Since the beginning of time?

I can't believe a smartphone costs $500, though, no wonder I don't have one.

Eolake Stobblehouse said...

"And, no, 200$ tablets aren't selling at cost."

When the first Kindle Fire came out, all analysts agreed that it was sold at cost at $200. Granted, that's 1.5 years ago, but since then the screens and everything has improved a lot.

TC [Girl] said...

Anon said...

I can't believe a smartphone costs $500, though,

Yeah...not very smart, is it?! More like CRAZY phone! :-( I don't have one for the very same reason; I'm too frugal for that kind of nonsense!!

Eolake Stobblehouse said...

Most people don't realize it, cuz they buy it subsidized. And end up paying even more!!

T-Mobile (read recent David Pogue) has changed it so the payments drop once the phone is actually paid off! Woa.

Monsieur Beep! said...

It's the law of the market. A healthy thing when left un-disturbed.

John Krumm said...

Not only do you buy it subsidized (at least in the U.S.) but you keep paying the subsidized price after the phone is payed off. Everyone pays the subsidizing price for most carriers, whether you own the phone or not. It's one of those "needs intense regulation" industries.

Bert said...

When the first Kindle Fire came out, all analysts agreed that it was sold at cost at $200.

Which analysts? The same guys who were touting subprime mortgages as the invention of the century? Seriously, weather prediction is far more accurate than most so-called industry analysts. (How many of those experts predicted Apple's current nose-dip? ;-P )

Also, if you re-read my comment, I clearly stated that 200$ tablets built on mature technology are profitable. In electronics, if you want to be on the bleeding edge, you best be expecting a hefty bill!

On the Kindles, the bulk of the money goes toward the cost of the display, which is based on a rather unique and very well protected technology. If you want it, you dish out the semolinas, end of story. But Amazon don't care about profit on the readers, they're after the ebook market.

Eolake Stobblehouse said...

Well, but this is simpler than prediction. You just need to find out what each component costs, and make a hopefully educated guess as to how much bulk rebate a big company could get, and so on. It would take research, but it's hardly black arts.

Bert said...

You just need to find out what each component costs

Good luck with that!! That's precisely the problem, as no two players are likely to pay the exact same price for the same component, when talking about real volume.

Ever heard that building a car entirely from spare parts would cost well north of ten times the car's market value? Well, it's true. To pretend finding out how much it costs to build any device from the list price of the components is totally ludicrous.

When you are buying hundreds of thousands, or even millions of a component every year, especially of an expensive part like a large (-ish) display, that gives you real leverage over the seller. In such a context, how much the seller wants you as a client has a lot of influence on the price. On a new-ish, relatively small volume business like e-ink*, a guaranteed minimal production can and very often will increase the manufacturer's profit margin on every other sale they make, so it is a powerful incentive.

Of course, you need credibility (usually in the form of past purchasing history) to exert that leverage. It's one thing to say you will buy millions of parts, it's something else to actually do it. I am sure Amazon had no problems in that department during negotiations, so they really got unbeatable pricing, I am certain of that. Anyway, in that game, no smart buyer ever pays book price. Ever.

The actual selling cost of a part on very large orders is actually kept secret, by contract, mainly so that the seller doesn't have to cope with tantrums from all their smaller clients. Analysts don't have access to that kind of privileged information, no matter how well connected they think they are. In fact, being outsiders of the (quite) annoying kind, they are the most likely to be lied to... ;-p

* Before questioning that comment on e-ink volume, ask yourself how they compare with LCDs in terms of presence, for example...

Eolake Stobblehouse said...

Ah, good points. Thanks.

One thing: I'm sure Bezos said that they are selling them at cost. Are you saying he's flat-out *lying*?

Bert said...

One thing: I'm sure Bezos said that they are selling them at cost. Are you saying he's flat-out *lying*?

It's very possible in the case of Amazon since, as mentioned above, they are after the e-book market and not selling Kindle readers. The readers are only a necessary pain for them (they are not a manufacturer, nor do they care to become one).

But I'd still tend to think that, when he says they are selling at cost, he really means that they are not trying to make money on the readers. They have to add some margin anyhow or Amazon would end up losing money in the deal (and Jeff certainly wouldn't like that). There are simply too many more-or-less hidden costs when it comes to corporate giants like Amazon to really know how much a project costs.

Plus, the learning curve being what it is, they would have to be very dumb to not see their cost going down significantly as the production volume increases. So, even if he wasn't lying at the time he said that, it might not be true anymore... mind you, they did lower prices significantly at some point, didn't they?