Value Smartphone Battle Heating Up

Sub-$150 value smartphones expected to outsell premium models by 2017.

As the premium segment of the smartphone market matures, attention is turning toward low-cost smartphones, especially in emerging markets, but a move down market brings with it the prospect of thinner profit margins.

Chipmakers are pursuing this opportunity from different angles and at different paces, according to John Jackson, vice president of research at IDC.

“There is going to be tremendous competition at the low end for smartphones,” said Jackson, just ahead of the International Consumer Electronics Show now underway in Las Vegas.

However, it’s not clear to Jackson whether or not smartphone industry leaders based in Western markets will be in a strategic hurry to address the lower-cost category.

“If you’re enabling $70 Android phones, you might be guilty by association in terms of what the street [Wall Street] expects your margin profile to look like,” said Jackson, who warns that profit margins are likely to get squeezed for companies making low-cost smartphones.

Low-Cost Smartphones Poised for Growth

A variety of industry reports indicate that smartphones costing less than $150 could soon outsell premium phones priced at $250 and higher.

Smartphones are expected to account for roughly half of the 2.1 billion handsets sold around the world by 2016, according to Portio Research. In the United States, research firm Informa reported that more than 80 percent of smartphones sold this year cost at least $250. But by 2017, Informa estimates that entry-level smartphones that cost $150 or less will outsell more expensive smartphones and account for just over half of the mobile phone market.

NPS DisplaySearch expects sales of low-cost smartphones to double each year between 2010 and 2016, and Strategy Analytics predicts sales could reach up to 500 million units by 2015.

Value Segment Squeezes Margins

At CES 2013, Intel showed a working reference design intended to help phone makers quickly build their own branded low-cost smartphone.

Jackson said that smartphone chipmakers see the opportunity, but they face big challenges in driving down costs for making silicon and software that allows phones to make calls, access the Internet, capture photos and video and perform other computer-like functions.

“Certainly everybody is rushing in,” said Jackson. “Chip companies like Spreadtrum and MediaTek are trying to move up into the smartphone market, Qualcomm and Nvidia are trying to move down and then others like Broadcom, Marvell and ST-Ericson are trying to move in.”

Even Apple is reportedly working on a new, cheaper iPhone for launch later this year, according to the Wall Street Journal.

While introducing a chip codenamed “Lexington” for low-cost smartphones at CES 2013, Mike Bell, vice president for mobile and communications technology at Intel, said he sees rising demand in emerging geographies such as Latin America, Africa, China and South East Asia. “First-time buyers in these markets will be thrilled with the features and performance they get from these devices,” he said.

Without the right strategies, however, chipmakers could have a tough time making a profit, according to Jackson.

“If there are efficiencies that a company like Intel might bring by virtue of its access to more efficient process and fabrication technologies, and the extent to which that might make lower-cost solutions more economical for Intel and ODMs, that could be a source of advantage.”

Jackson said this round of competition is just the beginning of what we will see on the path to reaching the next billion smartphones at price points lower than $150.