The 9.7-inch iPad costs Apple $316 to make and sells for $499. The 4-inch iPhone costs Apple $207 to make and sells for $649. Yet, most consumers buy iPhones and other overpriced smartphones like hotcakes because they pay a little upfront while mortgaging the next two years with an expensive smartphone contract. That's starting to change with the arrival of the Google Nexus 4 and companies like Blu Products selling premium smartphones that traditionally cost $600 for less than half the price.
I bought the Nexus 4 smartphone (16 GB model $349) last November even though it took three weeks to get it. The demand was so high that it took six weeks for my friend to get his $299 8 GB model even though he was ordering from the second batch after Google already knew about the heavy demand from the initial orders. It doesn't take a PhD Economist to know that selling a product at half the traditional price is going to generate exceedingly high demand, but it still took Google many months to meet demands.
You also don't need to be a mathematician to figure out that buying a smartphone with a low entry price and a two-year contract will cost hundreds of dollars more over the life of the contract, yet the vast majority of U.S. consumers buy contract phones. Economists have tried to explain how subsidies nullify price sensitivity and many articles have been touting the benefits of unlocked phones till they were blue in the face, but nobody listened because of unlocked smartphone sticker shock. As soon as people see a $650 or $850 price tag, the thought of saving a few hundred dollars over two years goes out the window.
BYTE recently ran a special report on unlocked phones. Click here to read why you would want one, how to buy it and how to activate it.
The subsidized smartphone game has been a great racket for the smartphone makers so long as everybody played along, but that might be coming to an end as companies like Google and Blu Products start offering very nice smartphones at half price.
The Google Nexus 4 was a great start and we'll probably soon see a larger Nexus smartphone with full 1080P display. Smaller manufacturers like Blu Products will launch the Blu Life View smartphone with a 5.7-inch display for $299. The resolution of the Life View hasn't been officially specified but GSMArena lists it at 1280 x 720. That's not full 1080P but it's still higher than the iPhone 5 and it's less than half the price of competing products.
Once people realize they can get a great smartphone for around $300 (which isn't much higher than the upfront cost of a contract smartphone), that could spell the end of the high margin subsidized smartphone business model. That would mean eroding profit margins for smartphone makers and fewer locked in smartphone customers for the cellular carriers. That might be bad news for Samsung and Apple, but I for one, welcome our new unlocked smartphone overlords.