For a long time, the cost of a fast, high-end smartphone
with the latest technology seemed definite. You were paying $600 or $700
no matter whether you did it up front or spread out over the course of a
two-year carrier contract. This doesn't have to be the case today,
however. There's an exciting new category of phone on the block—the
"cheap flagship," a phone that has flagship or very-close-to-flagship
specs but only costs around $400.
We're talking about devices like the $305 Xiaomi Mi 5, the $380 LG Nexus 5X, the $400 Nextbit Robin, the $400 Moto X, and the $329 OnePlus 2.
These phones all shipped with the best (or close to the best) SoC at
the time, beautiful screens, and the usual set of features. If you
didn't have a sheet of spec tables in front of you, you'd likely have a
hard time pointing out the differences between these devices and a $700
flagship. Cheap flagships might not be at the absolute bleeding edge of
capabilities, but they all aim for "good enough."
Typical specs (beyond price)
Consider the current state of the big $700 flagships from
companies like Samsung and LG. These super flagships are bloated with
tons of occasionally nice to have but mostly unnecessary extras. They
are the very best they can be, because in the fight to entice customers
to upgrade every year, these companies throw in every bell and whistle
under the sun. Samsung is the king of this—the Galaxy S7 Edge has a
curved AMOLED display, a heart rate sensor, waterproofing, a magnetic
field generator (for Samsung Pay), and an outrageously high 500+
PPI display. It even doubles as the heart of a virtual reality gaming
system. The LG G5 has a laundry list of extras, too. There are two rear-facing cameras, a color spectrum sensor, another overkill 1440P display, and a modular accessory system.
But usually at a flagship Samsung or LG launch event,
price isn't even mentioned. We typically have no idea how much these
devices cost until carriers put them up for sale. The message seems to
be that these are super-luxury items and money is no object—don't worry
about the price. Compare that to the launch of a Xiaomi or Nexus device.
Price is not only mentioned, it's usually marketed as a major feature
of the device.
One of the earliest examples of a high-profile cheap flagship was Google's Nexus line. In 2012, Google started selling the GSM Galaxy Nexus directly
on the Play Store for $400 unlocked and off-contract. Since then nearly
every Nexus launch (save the Nexus 6) had a model at the $300 to $400
price point. Add in some quick software updates, and the Nexus line won a
lot of fans among Android enthusiasts. For a time, there were whispers
that Google must be subsidizing the phones. But now, we're seeing other
manufacturers meet this price point and pick up the mantle of
"bang-for-your-buck" phones.
The name of the game when you're building a cheap flagship
isn't just cost-cutting, it's about finding ways to cut costs in ways
users won't miss. The "value-added" features listed above are usually
the first to go, and the OEMs focus instead on good specs and quiet
competence. The display usually gets dialed back to 1080p, which still
gives you a 400+ PPI on a 5-inch screen (the iPhone 6 is 325 PPI). And
when the cheap flagship is done right, it also includes the latest
extra features that customers care about and will notice—things like a
fingerprint reader, NFC, and USB Type-C.
Since these cheap flagships offer much of the power and
important capabilities of the more expensive flagships, they often
cannibalize the sales of more expensive flagships.
Currently, manufacturers that build something for this evolving market
usually fall into the "nothing to lose" category—they simply don't have
a high-end device to cannibalize. Google had no smartphone sales at all,
so it was fine undercutting the competition with $300 and $400
smartphones. Motorola picked up the price point when it was under Google
ownership, and it has (so far) continued under Lenovo's rule. Newcomers
Xiaomi, Nextbit, and OnePlus had no established market presence to
consider either.
Emerging markets and the death of two-year contracts
Enlarge/ Verizon's iPhone SE page. Now that the "free with two-year contract" option is dead, the cost of the phone is more obvious.
Why are more
companies jumping onto the cheap flagship bandwagon? One reason is the
rise of "emerging markets." Developing countries like China and India
are reaching the point where everyone wants a smartphone. Given the
massive population—those two countries have a combined 2.6 billion
people—smartphone vendors are starting to target those areas for
expansion. Generally, these markets are more sensitive to pricing than
other smartphone-heavy countries. So for most vendors, the easiest way
to target these new users is to bring prices down.
Analyst firm IDC
lists Xiaomi as the top-selling vendor in China for 2015, and its
devices have an average selling price of $141. Huawei is in second place
for market share, and its average selling price is $213. If you happen
to have the most valuable brand on Earth,
though, you can still charge a premium and do well. Apple occupies the
number three spot in China and has an average selling price of $718. But
most brands are not the most valuable brand on Earth, and Apple is also
the only vendor for iOS, giving it a truly differentiated product.
Everyone else is just reskinning Android.
Here in the United States, the death of two-year contracts
and the smartphone subsidy will probably put the price of smartphones
more front-and-center in consumers' minds. The big four carriers have
all recently backed away from two-year contracts. The result is two
options—a monthly payment plan or paying full price—that more directly
reflect the cost of a new smartphone. Two-year contracts used to hide
the cost of devices with across-the-board higher monthly bills and early
termination fees. With the new payment plans, your monthly bill changes
depending on how expensive your smartphone is.
Take the current cheap iPhone—the iPhone SE—on Verizon,
for example. The two options are paying the full price of $399.99 or
paying $16.66 a month for 24 months (which most customers can easily
figure out is still $399). Previously, a two-year-old iPhone that
occupied about the same price bracket would have been listed as "free
with two-year contract."
Some carriers only really dumped the two-year contract in
2016, so this is a recent development. With most customers still on a
two-year contract, the change hasn't widely affected buying habits yet.
With the option of a higher monthly bill or paying full price going
forward, I'd imagine customers will start paying more attention to the
true cost of a smartphone.
For now, Xiaomi is probably the standard-bearer for the "cheap
flagship" movement. That is, at least if you live in one of the
countries where it operates. The company expertly cuts costs in places
where most customers won't feel it, while including features they care
about and mostly keeping up in the spec race. Consider the freshly
launched Xiaomi Mi 5. For $305, you get the very latest SoC from
Qualcomm (a Snapdragon 820), but Xiaomi uses a lower-binned version of
the SoC. "Product binning," if you're not aware, is the process of
categorizing CPUs (or another integrated circuit) based on how well they
survived the manufacturing process. Some CPUs can handle higher
frequencies than others, while others have small but not fatal defects
in sections of the chip that can be disabled to create lower-end parts.
On the base model, Xiaomi's lower-binned Snapdragon 820 has a
CPU that runs at 1.8GHz instead of the usual 2.15GHz, and the GPU drops
from 624MHz to 510MHz. It's a small change that won't affect
performance much, but Xiaomi probably saves a bit of money by picking up
these slightly slower Snapdragon SoCs.
If you don't want to deal with a lower-binned CPU (or want a more
comparative spec), there's the Mi 5 Plus, which has a Snapdragon 820
that runs at the highest frequencies. That phone is still only about
$350.
Enlarge/ The smartphone patent wars. For Xiaomi, coming to the West means dealing with this.
Xiaomi's cost-cutting doesn't just stop at specs, though.
The company also saves some money by sitting on the sidelines of the
Western world's patent wars. The company doesn't do business in every
country—its main stomping grounds are its hometown of China and other
"high population countries" like India, Indonesia, and Brazil. By
staying away from the West, Xiaomi has so far managed to avoid the
Smartphone patent wars. In countries like the US, for instance, just
about everyone involved with smartphones is suing everyone else.
This is all outrageously expensive whether you win, lose, or
settle. It's a big headache that Xiaomi has so far avoided. But with a new accessory store in the United States, it seems like Xiaomi is still considering lawyering up and joining the fray.
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