Mike Mozart

The average selling price (ASP) of smartphones is falling and they are growing increasingly similar. It’s much quicker to point to the minor differences between the latest releases than it is to list all they have in common. The platforms have never been more alike, the result of years of borrowing the best features from each other. Commoditization in the smartphone market is happening and it presents some interesting questions for Android OEMs.

What is commoditization?

According to Merriam-Webster, to commodify is “to render (a good or service) widely available and interchangeable with one provided by another company.”

Think of the PC market, where price largely trumped brand and differentiation. There’s very little that is unique about any of the latest smartphones and if an innovation by one brand appears to have had an impact with consumers it becomes a standard within months. It’s a problem that’s especially clear at the bottom end of the market.

If manufacturers can’t compete on things like features and build quality then they compete on price.

The same inside

When you look at the spec sheets of a lot of smartphones, they really are incredibly close. Most of the components are identical, made by the same companies and just put together a little differently, or skinned with a UI overlay and a smattering of apps. Even the UI features and apps that OEMs try to use for differentiation are strikingly similar.

An extreme example of this is original device manufacturers (ODMs) selling their unbranded devices onto OEMs. Many big OEMs started out doing this, for instance, HTC made phones for Fujitsu-Siemens and Sony Ericsson. It’s still a very common practice and it contributes to the homogenization of smartphones.

A race to the bottom

This chart illustrates the falling ASP pretty clearly and it highlights the difference in Apple’s approach. We can sum it up by simply saying that Apple isn’t willing to cut profit margins in exchange for increased market share.

You will find more statistics at Statista

Looking at IDC’s last prediction it forecasts an ASP of $247 for Android smartphones this year and predicts that will drop to $202 by 2018.

We shouldn’t ignore the fact that this trend is also being driven by smartphone penetration reaching saturation levels in developed markets. The new battleground is emerging markets with different needs and expectations and one of those is lower prices.

Google is happy

Take a look at what Google has done with the Nexus line and with Motorola (when it was briefly in charge). The Nexus 7 and the Nexus 5 had razor thin profit margins; there was even some speculation that Google might be making a small loss on them. A Wall Street Journal piece last year suggested that the Moto G has a profit margin of less than five percent, compared to 28 percent for Samsung Galaxy S4, and at least 30 percent for Apple’s iPhone 5S.

Driving the ASP down is a win for Google because the aim is to get Android devices with Google services on them into the hands of as many people as possible. Google is all about the market share because it’s really set up to gather data and sell advertising.

Google is also pushing for less fragmentation and hoping to create an Android experience that is uniform across devices. The introduction of Android L and Material Design addresses this directly, as do the Google Play edition phones and the rumored Android Silver program.

Samsung is sad

There’s no way to spin this as a positive for Samsung. As the other OEMs drop prices Samsung is forced to follow or risk losing the commanding market share it has built. Does it have the brand loyalty and control over the platform that Apple maintains? The Galaxy brand is powerful, but Google controls the platform. This is one of main reasons there was so much speculation about Tizen, but it doesn’t look like Samsung is going to make that leap.

Samsung gained command of the TV market by undercutting the competition and it has a profit margin well below 5 percent. In the first quarter of 2014 Samsung’s mobile wing accounted for 76 percent of the company’s overall profit. It’s expected to announce a third quarter of profit decline in a row because it simply isn’t making as much money selling smartphones or smartphone components as it used to and that’s because the ASP is going down.

What about the other Android OEMs?

This isn’t good news for a traditionally premium brand like Sony either. It has to hope people will be willing to spend more on quality and leverage its own ecosystem of content and electronics to provide greater incentives to buy a Sony Android smartphone over something else. HTC appears to be proving that premium build quality has a genuine appeal and can secure a decent market share.

Most of the rest of the gang (LG, Huawei, Lenovo, ZTE, TCL Alcatel, and Xiaomi) are already engaged in an aggressive price war.

The downward spiral

There’s always going to be room for premium brands. People buy into the relationship between quality and high prices, but there’s a limit to how many premium brands can expect to go on extracting a good profit from the smartphone market and Apple is firmly entrenched.

If the Android OEMs don’t resist the drive to drop prices then they could end up like Dell and HP in the PC market, locked in a price war that ends up destroying their profitability altogether. It seems like the increasingly divergent interests of Google and the big OEMs could cause some problems down the line.

In the short term there’s enough potential profit to go round and let’s not forget that the price war is great for consumers, but it can’t last forever.