Apple, Samsung, and the New U.S. Mid-Tier Smartphone Market
Bottom Line
For a variety of reasons explained below, the U.S. has never had a mid-tier smartphone market. The Covid-19 pandemic could change that, especially since Apple and Samsung have products seemingly tailored perfectly for the moment.
Why Hasn’t the U.S. Had a Mid-Tier Smartphone Market?
The U.S. is a carrier-driven market; over 80% of all smartphone sales come at carrier retail, and a large portion of the rest comes from Apple, not Amazon or Best Buy. Technical differences among carriers, promotions, and financing have maintained this system even after T-Mobile weaned the industry off of subsidies in 2013. This has meant that if U.S. carriers don’t offer mid-tier phones, U.S. consumers won’t buy them. These same factors, along with high network testing costs, have meant that much of the phone variety available to consumers in Europe and Asia are not sold in the U.S. through mainstream retail channels at all – even if consumers were willing to buy them, they can’t.
However, at first glance, this entire premise is wrong: if you examine carrier post-paid pricing, there is not much daylight between different price points. For example, here is a graph of AT&T phone prices on April 7, 2020. You’ll note that while most phones are above $600, there is still a smooth cluster of phones at price points all the way from $100 to $1400 before going haywire with Samsung’s highest end Galaxy S20 Ultra and Galaxy Fold:
It certainly looks like there is plenty of choice at price points below $600. Even if you look at the number of phones in different price bands at $250 intervals across the three national carriers, the mid-tier is fairly well represented.
However, if you examine the actual phones on carrier shelves, you find that nearly all the phones between $350 and $600 are from Apple, and they are all really old. (Apple is the only brand that can sell brand new versions of such old designs because it is the only vendor that consistently supports phones that are three+ years old with regular software updates.) Some of these are phones that Apple itself has long removed from its own site, like the original iPhone SE from 2016, and the iPhone X from 2017, but the carriers are still selling them. (These are all brand new phones; there is a separate market for used devices.) There must be some price-sensitive buyers that carriers are targeting with this old inventory — and keyboard lovers for the 2017 BlackBerry KEYone at AT&T. However, if you remove phones that were introduced over two years ago, the price band distribution looks very different:
Now the problem is clear: U.S. carriers offer very few new phones below $600. The lack of phones below $300 in the data from carrier postpaid lineups is somewhat understandable: each national carrier also has one or more prepaid brands which cater to the most price-sensitive consumers. T-Mobile has eight phones at or below $250 on its main brand, but its prepaid brand, Metro, offers eleven. AT&T only has three phones at or below $250 for postpaid subscribers, while its prepaid brand, Cricket Wireless, has thirteen, not counting four iPhones from as far back as 2015. But in the crucial space between $300 and $600, there’s very little to choose from.
Why don’t carriers offer more mid-tier phones?
There are three factors driving most U.S. consumers to purchase fairly expensive phones:
Wealth – The U.S. is the largest economy in the world, and no large country has higher median incomes. Americans buy expensive phones because they can afford them.
Apple – While Apple does sell some phones below $500, the average selling price of an iPhone is around $700 (or perhaps higher; Apple no longer provides the metrics for precise measurement). The U.S. is Apple’s home market, the iPhone was sold there first, and Apple’s user interface and services have proven are extremely sticky. As a result, nearly half of all smartphones in the U.S. are iPhones. Among teenagers, that percentage is far higher: surveys show that iMessages’ “green bubble effect” has driven over 80% of U.S. teenagers to the iPhone.
Carrier control – While carriers no longer lock consumers to their services with a contract, layered incentive programs (promotions, trade-in allowances, and interest-free financing) act to keep subscribers from churning.
Once the phone price is split out over 18 – 30 monthly payments, U.S. consumers who have been able to afford a few dollars more per month have had little incentive to look lower than to flagship phones that have typically been priced between $650 and $850. Early adopters have been tempted by even more expensive phones. Prepaid buyers who do not qualify for incentive plans often cannot afford to buy phones above $250 – ideally under $150. There has simply been no natural audience for mid-tier phones in the U.S. When carriers have offered them from brands other than Apple, they have not sold.
The market IS changing
Smartphones are now mature, and even relatively inexpensive phones now provide responsive performance, large displays, and cameras that take excellent photos when lighting conditions are good. In a mature market, vendors seek segmentation to maximize profits, and that is exactly what smartphone OEMs have done. At the high end, Apple, Samsung, and Huawei have pushed flagship phones above $1,000, and new folding designs range from $1380 to $2600. Even in developed markets like the U.S., Western Europe, and South Korea, there has been some pushback against prices above $1,000. While Apple’s iPhone X was its best-selling phone when it launched in 2017 despite the $999 - $1149 price, in 2019, the $699 - $849 iPhone 11 was Apple’s volume leader after launch.
Outside the U.S., there have always been a plethora of Android options at all price points. The competition in Southeast Asia is especially fierce below $200, and Chinese OEMs have made big market share gains in Eastern Europe in the $200 - $400 range. This success has pressured Samsung to respond with significantly better products below its S and Note flagships, and Samsung’s best-selling phone in 2019 was the mid-tier A series. Samsung is now bringing some of those phones to the U.S. Samsung is also unwilling to let Chinese competitors use 5G as a beachhead – especially in Europe – so it is offering a pair of A series phones with 5G starting at $500 this summer (the $499 Galaxy A51 5G and $599 Galaxy A71 5G; see Samsung A Series - The Right Pricing At the Right Time). There will be increased competition in the mid-tier from Chinese brands in the U.S. later this year, as well, from TCL, Coolpad, and Motorola (see CES: Five Key Trends).
Back in 2016, Apple launched the iPhone SE, which opened up the iOS ecosystem to price sensitive consumers outside the U.S. and delighted fans of smaller phones at home. The original iPhone SE was discontinued last year, but Apple is repeating the strategy with a new iPhone SE based on the iPhone 8 design. The new $399 iPhone SE is technically the smallest iPhone available, but it is not a small phone and it is unlikely to sell on that basis alone. It is, however, an extraordinary value thanks to its inclusion of the A13 processor and camera capabilities that rival much more expensive phones. Apple's A13 is a remarkable piece of silicon – it outperforms everything else on the market at any price point – but Apple is not trying to create a new low-priced high-performance segment. Other mid-tier phones coming to market are not going to use Qualcomm’s flagship 8-series Snapdragon processors to compete with it. As Apple relies more on services for growth, the design goal for the iPhone SE was to create an inexpensive entry point into the iOS ecosystem that can be sold, unchanged, for years to come. In an industry that runs on twelve-month cycles, the last iPhone SE was sold for four years.
The new mid-tier U.S. smartphone market
Apple and Samsung did not plan their launches for a global pandemic, but they are the right products for the time. Covid-19 is decimating large segments of the economy. While there are undoubtedly some people who got stimulus checks that supplemented secure incomes, tens of millions of Americans are already unemployed or underemployed. Even more are likely to be unemployed in the coming months as travel, events, and entertainment will recover slowly until a vaccine or cure is fully deployed.
However, the pandemic also proved how vital phones and laptops are for working from home and distance learning. As screens crack, batteries no longer hold a charge, and more work is effectively transitioned away from central offices, consumer tech purchases will continue. There is historical precedent for this: radio sales doubled throughout the decade of the Great Depression. Hopefully, this disruption will not last that long, but for the duration of the recovery period, consumers who have lost income will be forced to keep their current devices indefinitely. When those phones do inevitably fail, many will be replaced by sub-$250 phones because their owners have no choice.
Those who are still employed but are experiencing economic insecurity will be looking for better values. This is where the mid-tier market opens up: saving “just a few dollars a month” will now be necessary. In the past these buyers would have stretched their budget without hesitation, but with appealing options now coming to carriers from Apple, Samsung, and others, they will be much more willing to compromise - because it won’t feel like as much of a compromise.
There may still be a gap between $250 and $400 (“a bit of a black hole” on the chart above), especially since many iPhone users will be unwilling to abandon iOS. Carrier discounts and the used market are likely to grow significantly in this pricing segment.
Recommendations
Smartphone OEMs
Apple and Samsung are two of the largest advertisers in the world, but both companies spend most of their budgets on their flagship phones. In the current environment, that needs to change. Concerns about cannibalization are understandable, but not relevant. It is better to cannibalize yourself than have a competitor do it. Smartphone vendors should be more concerned about maintaining their relationship with consumers and keeping unit volumes high for their supply chains, which keeps costs low. Samsung’s A series messaging should focus on Samsung design, display, and cameras at more accessible pricing. The iPhone SE should be promoted as the $400 iPhone that does everything you need, but is powerful enough to receive software updates for years to come.
In the U.S., wireless stores are often considered essential service providers. However, even when retail locations are not under actual lockdown due to government mandates, they will be under de facto lockdown until consumers are not afraid to risk infection or spreading the disease. Online-first brands initially could not rely on retail channels, and their best marketing practices should be copied. OnePlus sends out elaborate reviewers kits to encourage unboxing videos. Xiaomi has active forums where consumers make feature requests. Just because the price point is lower does not mean OEMs can’t encourage online communities around these brands.
Lenovo’s Motorola division has been launching its mid-tier One series phones outside the U.S.; these should all be available in the U.S. unlocked, and, ideally, at carrier retail. However, Motorola’s biggest opportunity is to expand sales of the $200 - $350 G line. They fill an important need, providing well balanced phones at low prices that don’t look or feel cheap. The Moto G Power should be the hero product: with a huge 5,000 mAh battery and modest power needs, Techsponential’s review unit has gone two to three days of real-world use before needing to be recharged. Motorola needs a guerilla marketing campaign encouraging consumers to share feats of longevity. It should start by highlighting Covid-19 nurses working 72 hour shifts.
TCL’s new 10 line has attractive pricing, and upcoming phones that offer 5G below $500 should make carriers happy. But it is going to be challenging to launch a new mobile brand without retail tie ins from TCL TVs, all while Samsung is actually paying attention to this segment. While TCL’s mobile division doesn’t have the budget for its phones to become a staple giveaway on Ellen (the marketing technique TCL TV used to grow in the U.S.), ad rates are down and content creators are hurting. TCL should replace those phone sticker and case companies as the default sponsor for key YouTubers and influencers.
Carriers and Retailers
T-Mobile’s Uncarrier brand is all about providing value, but T-Mobile’s phone lineup is all about providing a few easy choices for consumers and reducing inventory management issues for the company. It is time for T-Mobile to offer more choices to postpaid customers beyond its self-branded REVVLRY.
Charter and Comcast both have successful MVNOs that are growing by targeting high-value customers and locking them into triple and quad -play deals. Understandably, they have focused on BYOD and selling iPhones and Galaxies. However, even these consumers are going to need less expensive options going forward. Charter’s Spectrum Mobile just offers the iPhone SE, LG’s Stylo 5, and Google’s Pixel 3a. It should look to Comcast’s Xfinity Mobile, which has three Samsung A series phones and Motorola’s G Play. Both MVNOs should instruct phone reps to highlight that there are more affordable options; many consumers genuinely don’t know about them.
Amazon has long sold unlocked phones across the price spectrum but it could not possibly do a worse job of merchandising them. Where is the landing page that helps consumers match their needs and budget with good options? What happened to the Prime Exclusive program? Why, if you search for “smartphones,” does Xiaomi’s Redmi Note 8 (GSM Only, No CDMA) International Version - No Warranty” show up as “Amazon’s Choice?”
To discuss the implications of this report on your business, product, or investment strategies, contact Techsponential at avi@techsponential.com or +1 (201) 677-8284.
Techsponential clients have access to all the original pricing data and additional charts from this report.
[originally published April 29, 2020; updated with additional recommendation for cable MVNOs May 14, 2020]