Is This $199 Smartphone a Flagship Killer?

By Markets Fool.com

Just a few years ago, people who bought mid-range smartphones priced in the $200-$300 range before subsidies were making significant sacrifices in quality and performance. Flagship devices, which typically cost $600 or more before subsidies, were vastly superior.

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Each year, new models improved dramatically from their predecessors, offering higher-resolution displays, faster processors, and nicer materials. Those unwilling to buy the best were often stuck with lackluster devices.

But the gap between mid-range smartphones and flagship smartphones has been narrowing, and with the recent U.S. launch of the Zenfone 2 from Asus , a company best known for its laptops, the days of expensive, flagship smartphones as the only top quality products available may be numbered. Samsung and Apple , both heavily dependent on sales of expensive smartphones, could have a serious problem.

Source: Asus.

A look at the Zenfone 2
The Zenfone 2 has been available in international markets for a while, but the company just released the phone in the U.S. in May. It comes in two versions: a base model priced at $199, and a higher-end version priced at $299. The base model is about one-third of the price of flagship phones like Samsung's Galaxy S6 and Apple's iPhone 6.

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The Zenfone 2 is powered by an Intel Atom processor -- a rarity -- with the base version coming with the Z3560, clocked at 1.8GHZ, and the high-end version coming with the Z3580, clocked at 2.33GHZ. Both have a 5.5-inch, 1920x1080 resolution display, and run Android 5.0 out of the box. The base version has 2GB of RAM and 16GB of storage, while the high-end version has a whopping 4GB of RAM and 64GB of storage.

Anandtech did a full review of the Zenfone 2, and their benchmarks show that the phone, while certainly not the fastest available, is surprisingly competitive with flagship devices. It blows other mid-range phones completely out of the water in terms of performance, particularly outshining the $179 Moto G from Motorola. The Basemark OS II benchmark, which tests the overall performance of the CPU, GPU, RAM, and storage, has the Zenfone 2 more than doubling the score of the Moto G. It also beats out older flagship phones like the iPhone 5s and the LG G3, while coming in a bit behind newer flagship phones.

In Anandtech's PCMark test, the Zenfone 2 actually comes out ahead of all other phones being tested, including the Samsung Galaxy S6. PCMark is designed to test real-world usage scenarios instead of raw performance, and the Zenfone 2 puts up some pretty impressive numbers.These benchmarks are for the higher-end version of the Zenfone 2, but the base version shouldn't be too far off.

The Anandtech review sums up the Zenfone 2 thusly:

ASUS, with the help of Intel, is really pushing the limits of what a smartphone can be when it has to meet such a low price. The ZenFone 2 offers CPU performance that should probably be creating some concern at Qualcomm, Apple, and Samsung. It's very competitive with the silicon that we see in the most expensive flagship phones available, and both ASUS and Intel should be proud.

The Zenfone 2 comes up short in some areas, not surprising given its price. It's made completely of plastic, unlike flagship phones, which typically use aluminum or glass these days. I bought the $199 version of the Zenfone 2, and while it doesn't feel like a premium phone, it also doesn't feel cheap.

The screen isn't as nice as the Quad HD display that comes with the Samsung Galaxy S6, but it's surprising good for this price range. The Zenfone 2 is a solid phone, and I find myself continually amazed that it only cost $199.

Bad news for Samsung and Apple
Along with mid-range devices closing the performance gap, there's another trend that's working against sellers of flagship phones: the slow demise of subsidies in the United States. AT&Trecently eliminated two-year contracts at third-party stores, instead shifting to a model where consumers pay the full price of the phone over a period of 18-30 months.

Under a two-year contract, a flagship phone would typically cost around $200, while a mid-range phone would usually be free, or close to free. The monthly price of service would be the same regardless of the phone purchased, and this tended to hide the true cost of high-end phones.

Under AT&T's Next, the company's plan that doesn't require a contract, phones are paid for in installments, meaning that the monthly rate is higher for more expensive phones. For example, a Samsung Galaxy S6 would cost $22.84 per month under the 30-month payment plan, compared to just $6.67 per month for a Moto G, according to AT&T's website.

On top of these prices is the actual price of the plan, which is independent of what phone is purchased. The Zenfone 2 is currently only available unlocked from select retailers like Amazon and Newegg, but it may eventually be sold directly through AT&T. The base version should be priced similarly to the Moto G.

This difference in price becomes harder to justify as cheaper phones become better. The biggest loser is undoubtedly Samsung. Its phones run Android, so the only differentiation comes from performance and design. But with the Zenfone 2 giving flagship phones a run for their money in terms of performance, I suspect selling $650+ Android phones is going to become more difficult going forward.

Apple has the advantage of having a very strong brand, a loyal following, and its own ecosystem. Because of this, iPhone sales should fare far better than sales of flagship Android phones as mid-range phones close the performance gap. However, this doesn't mean that Apple is immune, and I think that the stickiness of Apple's ecosystem is going to be seriously tested in the coming years.

The end of flagship phones?
The Zenfone 2 isn't going to kill off flagship phones, but the trend that it represents -- bringing flagship-like performance to the $200-$300 price range -- is going to seriously challenge companies that depend on high-priced phone sales. The days of having to spend $650+ in order to get a decent smartphone are officially over.

The article Is This $199 Smartphone a Flagship Killer? originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Intel. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.