MediaFile

What happens if smartphones become commodities?

By Kevin Kelleher
September 27, 2012

Editor’s note: This piece was originally published at PandoDaily.com

Remember Antennagate? Back in the summer of 2010, the brouhaha over reception glitches in the iPhone 4 dominated tech headlines for weeks and led to a class-action lawsuit and a $15-per-user settlement. In retrospect, the controversy seems meaningless, which is why I thought of it amid the current flap over Apple Maps.

Apple will survive the Maps controversy, just as it weathered Antennagate. But there is another trend affecting Apple that the announcement of the iPhone 5 revealed, a larger trend that will take much longer to play out: Smartphones are becoming too similar for their own good.

Only five years after Apple refashioned the smartphone with its touchscreen and its iOS software, smartphones are becoming a commodity. Any must-have feature that distinguishes one phone from the pack is quickly adopted by the pack itself. Fandroids and Apple fanboys will always argue passionately about which phone is superior, but for mainstream consumers, it’s getting harder to see that one brand’s phone is better than the others.

When an industry becomes commoditized, there is less differentiation between the products being sold. Brands stop being so much of a driving force in consumer decision as low price becomes the paramount factor. Lightbulbs are consumer commodities, as are cheap foodstuffs like ramen and staples like salt.

Laptops and desktops have become commoditized over the past decade. It started with Dell, which used just-in-time supplies and customization to make its PCs a low-cost household item. But as others began to replicate Dell’s successful business practices, Dell became just another PC maker. And consumers learned to see that price was really the biggest differentiator among brands.

Today, PC makers like Asus and Lenovo are seeing their market shares rise because they can build PCs at lower costs – and sell them at competitive prices. Dell and HP are seeing their sales fall by more than 10 percent a year. There is still a market for high-performance, well-designed laptops that sell for a much higher price, but it’s largely dominated by Apple and its MacBook Airs and MacBook Pros. So PCs aren’t dying. The bulk of the sales are just becoming consumer commodities.

Apple took control of the small but lucrative high end of the PC market by cultivating a loyal base of customers and pushing performance and design. Its computers are big sellers among people working in areas like film, music and programming. But for the legion of computer users who use PCs to perform mundane business tasks or to surf the Web, a low-cost PC – if not a tablet – works just as well for a fraction of the price.

Early on, Apple pulled off the same trick of cornering the high end of the market for smartphones. It’s been aided by the subsidies offered from mobile carriers like Verizon and AT&T, which lower retail price to, for example, $199 from $649 for a 16-GB iPhone 5 when a two-year contract is signed.

But other high-end smartphones, like the Galaxy S III, are also priced at $199 with a two-year contract. To many consumers, $199 has become a standard smartphone price, low enough that they won’t consider pricing when comparing smartphones. That could change, however. This year, Verizon and AT&T have started experimenting with cutting or limiting subsidies. That would make pricing a bigger factor when some people choose a smartphone.

Until then, the hardware and software features on a phone will remain what distinguishes smartphones from each other. But it’s getting harder to distinguish them. The iPhone’s intuitive touch-screen interface set it apart when it debuted in 2007, but is a standard feature today. So are other hardware features like the screen size, phone width and quality of the camera.

Apple focused the bulk of its innovation on the iPhone 5 on incremental improvements like a lighter, thinner phone, a faster processor and a better battery. And make no mistake, these are significant accomplishments, true innovations that make the iPhone a top contender. But while welcome, they lack the wow factor of earlier iPhones. And as this comparison table assembled by the Verge shows, the iPhone 5 looks a lot like top Android and Windows phones in many respects.

Reviews of the iPhone 5 uniformly called it the best iPhone to date, praising its slimmer shape, its lighter feel and its faster performance. But most also stopped short of declaring it the best smartphone on the market. Walt Mossberg called it “an excellent choice” after noting there were “plenty of other choices.” Engadget said it’s the phone for the Apple faithful, and while iOS is beginning to show its age, the phone itself “is sitting at or near the top” of most benchmarks.

In a few years, the iPhone has gone from the must-have mobile device to one among several models that are nice to have. There will always be a crowd loyal to the Apple brand, although some of them are growing annoyed with some new features. But for most others, there are multiple choices.

There is still plenty of room for more innovation in smartphones. And perhaps future iPhones will push Apple ahead of the pack again. But without dramatic new innovation, many smartphones will continue to resemble each other. And the more they do the more price will play a part in consumer choices. That, coupled with a desire among carriers to cut subsidies, could push down smartphone prices overall.

In that case, we could see a big change in the way the mobile industry works. Right now, people pay a high price for smartphones but shy away from apps that cost more than 99 cents. But if smartphones become commodities, that could reverse. The device could be low cost, but the better apps on them could command a higher price.

PHOTO: Apple iPhone 5 phones for sale rest on a desk at the Apple Store on Fifth Avenue in New York, September 21, 2012. Apple fans queued around city blocks worldwide on Friday to get their hands on the new iPhone 5 – but grumbles about inaccurate maps tempered the excitement. REUTERS/Lucas Jackson

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