Why You Might Spend a Grand on a Smartphone

By Tripp Mickle and Timothy W. Martin Features Dow Jones Newswires

Prepare for smartphone sticker shock.

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A decade into the smartphone era, Apple Inc. and Samsung Electronics Co. are betting they can increase sales by jacking up the price of their flagship products -- bucking the usual downward arc for prices of consumer electronics in the years after introduction.

Apple on Tuesday is expected to unveil a more-advanced iPhone -- also known as the anniversary iPhone, the iPhone 8 or iPhone X -- which analysts predict will carry a starting retail price of about $1,000. That would be about 50% more than the cheapest version of the iPhone 7 Apple introduced last year at $649, and about 30% more than the larger iPhone 7 Plus, at $769. (On Tuesday, Apple also is expected to show off updated versions of those phones with prices similar to last year's models.)

Apple's new iPhone debut follows Samsung's launch last month of its new high-end phone, the Galaxy Note 8, which hits shelves Sept. 15 starting at around $950.

Prices approaching $1,000 are more often associated with durable kitchen appliances than with pocket-size devices people tend to replace every few years. Yet Apple and Samsung think they will be able to sell tens of millions of smartphones at the higher price points, in part because of how vital the devices have become. Many users are willing to pay a premium for a handset that functions as not only a mobile phone, but also a personal computer, a video player, a gaming device, a GPS system, a music player, a reader, a flashlight and a wallet.

U.S. consumers now spend more than three hours a day on average on their mobile devices, according to research firm eMarketer. Patrick Moorhead, president of Moor Insights & Strategy, said people are postponing upgrades to their other gadgets so they have more to spend on their smartphones.

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"The utility value of these products is so, so high," said Horace Dediu, an industry analyst at Asymco and a former Nokia Corp. business development executive.

The companies believe their prices are justified to pay for innovations such as longer battery life, larger displays and voice assistants. Apple's newest iPhone is expected to have components that cost about 80% more than the components in the iPhone 7, including an edge-to-edge, organic light-emitting diode, or OLED, display, wireless charging and new sensors, according to brokerage firm Susquehanna International Group.

If consumers take the new price points in stride, Apple and Samsung could widen their advantage over hundreds of smartphone rivals, many struggling to break even. Apple and Samsung claim nearly all the industry's combined annual profits, with about 79% for Apple and 15% for Samsung, according to market researcher Strategy Analytics.

The two are defying the gravity that usually pulls consumer prices downward as innovation wanes and manufacturing costs fall. For example, average prices for TVs and laptops have fallen about 50% from their respective peaks over the past 15 years, to $467 for TVs and $598 for laptops, according to trade group Consumer Technology Association. Average smartphone prices have fallen 32% to $303 in the decade since the iPhone's introduction.

The average iPhone selling price rose about 2.5% to $645 in Apple's fiscal 2016, up from $629 in fiscal 2009. Last year's pricier iPhone 7 Plus with a dual-lens camera outsold its predecessor, the iPhone 6s Plus -- a sign consumers are willing to pay up for performance.

Samsung had to pull the Galaxy Note 7 from shelves last year due to overheating batteries, but the Galaxy S7 model went on to become its top-selling phone ever. Unlike Apple, Samsung, the world's largest phone maker by shipments, also sells hundreds of millions of lower-cost handsets, such as the "Z series" in India, which retails for around $90.

New features on Samsung's Galaxy Note 8 include a dual-lens camera and a mammoth 6.3-inch OLED screen. The Note 8's component costs rose about 20% over the prior year, according to an estimate by IHS Markit, a market researcher.

Many consumers are balking at a $1,000 handset. A recent survey of wireless consumers by Barclay's found only 11% of respondents would spend more than $1,000 on a smartphone, with respondents on average saying they would spend only about $580.

Apple and Samsung have financing plans that can obscure the full cost of new phones. Apple's upgrade program last year offered the iPhone 7 for $32 a month over 24 months -- about $120 more than the retail price but with an extended warranty and the option for an upgrade after a year. Samsung offers a similar, no-interest financing plan.

Wireless carriers, which have largely eliminated phone subsidies in recent years, also offer monthly payment plans

Rivals say the steep price tags could spell opportunity. Juno Cho, head of LG Electronics Inc.'s mobile division, the No. 3 player in the U.S., believes there will be a "sizable number" of consumers who find the pricing of certain premium handsets to be "simply out of reach." He hopes to grab part of Apple and Samsung's combined 60% U.S. market share with lower-priced, feature-rich phones.

Winning over loyal Apple consumers won't be easy, says Don Scott Carpenter, a 47-year-old executive at a nonprofit organization and an Apple die-hard. He upgrades to the newest iPhone every year and said his $179 AT&T bill is still less than he pays a month for cable, TV and internet.

"I won't flinch," he said of higher prices. The phone is "part of life. You keep it with you 22 hours a day."

Ryan Knutson contributed to this article.

Write to Tripp Mickle at Tripp.Mickle@wsj.com and Timothy W. Martin at timothy.martin@wsj.com

(END) Dow Jones Newswires

September 10, 2017 07:14 ET (11:14 GMT)