Technology is losing its premium price

 

The Oneplus One, Oneplus’s first product. The One was one of the phones that kick-started a revolution in smartphone value. Source: PCmag

It’s inevitable; Technology is sloooowly getting cheaper, and it always will. However something has happened in the recent months, especially in the smartphone industry. From the 500+$ cellphones like the IPhone, the HTC one M9, the Samsung Galaxy S6 and the LG G4, the pricing of smartphones on the market has recently fallen to incredible lows. A race to the top of the technology has quickly reverted into a race to the bottom of the price bracket. But prices are getting groundbreakingly low, whilst maintaining a fair amount of quality. Some companies have reduced the market cost of their cellphones down to the manufacturing price of their cellphones, which makes high quality products not only available to a greater audience, but also very attractive for current consumers. What sparked the race to the bottom and how are the prices able to get so low without companies collapsing?

Let’s begin with the basics. Technology has and is becoming more affordable, as older technology becomes more widespread and easier to manufacture.  But now it’s getting to a price where an average consumer can comfortably buy, for example, a 64 GB micro SD card without worrying about your wallet bleeding out and without worrying if that SD card can even hold all those photos that you took at that party last night (Don’t worry, it definitely can!)

A typical SSD from Kingston. Kingston is one of the major players in the SSD market, alongside Intel and Samsung. Source: PureOC

 

On the subject of SD cards, data storage is probably the technology affected the most by these decreases in pricing. I personally remember looking at an Interdiscount magazine and saying “WOAH, a 128 GB memory stick? That’s crazy”. It was also going for 400$ at the time. 5 years later that same flash drive is down to 60$, and likewise considered an overkill amount of storage. How about the ever growing SSD technology? Again, 5 years ago when they were new on the market, very few consumer computers had them. But since then, 128GB of SSD storage has decreased from 200$ to 50$, and has crept its way into high end consumer desktops and laptops. They still aren’t as affordable or even practical as the good old Spinning Hard Disk, but it’s still incredible to see a revolutionary technology decrease to a quarter of its initial price.

 

So data has become faster and cheaper. But what about other components?  Processors, Graphics cards, laptop batteries?

Well, unfortunately, these technologies have not seen as major a decrease in price. If anything, they’ve become even more expensive, as an effect of being ‘revolutionary’. But not for long. They will drop in price, and although real processing horsepower is still also a real expense, software is really what you should be looking out for.

You see, what is happening is that the technical requirements for newer software is decreasing (such as windows 10 and Mac OSX Yosemite), allowing older hardware to be used in conjunction with newer software. In fact, the laptop I typed the majority of this article on only has an Intel Celeron processor, which, in computer processing history, is the same kind of tech you’d find in those old grey Dell towers from the early 2000’s. Ancient technologies like these have been upgraded and optimized for compatibility with Windows 8 and Windows 10, and because it’s an old, virtually obsolete technology, it sells for a much cheaper price point, making really budget oriented laptops a possibility. It won’t run any big games and it won’t run Photoshop, but for work and school basics these processors do the trick. You no longer need to buy a 1200$ MacBook pro with the latest and greatest I5 or I7, Retina display, Force Touch, etcetera (unless you really need the software), you only need a 400$ budget Ultrabook with Windows.

A Microsoft Surface. Designed as a laptop/tablet combination, Surfaces typically consist of tablet grade specs on affordable, 500$ models, whilst still providing a unique feature set. Source: Microsoft

It’s not just Operating Systems. Some of the world’s most popular computer games, such as League of Legends, DOTA 2 and Counter Strike: Global Offensive have low specification requirements, expanding their popularity to people that cannot afford a proper gaming rig, which usually requires more powerful computing. Regular everyday applications are actually adapting towards lower spec computers, whilst also becoming cleaner and crisper, moving away from the metallic shading of Windows Vista or that transparent and rounded-corner Windows 7 look. Such an example is pretty much every modern iteration of a Windows program; Microsoft Office, Xbox, Outlook and Internet Explorer’s successor, Microsoft Edge.

But there is still more to the Hardware. Especially in the last decade or two, China (Huawei, Lenovo and Xiaomi), Taiwan (Acer, Asus, Foxconn and HTC), Japan (Toshiba and Sony) and South Korea (LG and Samsung) have all become major manufacturers of electronic components. As a result, manufacturing of components has become exceedingly cheap, certainly to a point that it becomes a humanitarian issue and not solely a matter of money. Either way, big multinational corporations can make more money by manufacturing for less and generous companies can make the same profit and sell their products for a cheaper price.

But what about company profit? Is it worth it for companies to sell their products more cheaply by cutting down company profit?

Oneplus seems to think so. If you’re unfamiliar with the company, they debuted their first budget smartphone, the Oneplus One, in 2014 which created a great rift between quality of their smartphone and quantity of money they demanded for. Containing the flagship specifications of similar flagships phones of the year, they sold their phone for half of the price (in some cases) than their greater, pre-established counterpart kings of the market such as Samsung and Apple. A year later they’re still going strong with the One’s successor, the Oneplus Two, and even cheaper smartphone offering specs comparable to the original Oneplus One, called the Oneplus X. It has become ‘the Android equivalent to an IPhone 5S’ if you will. This is what has shocked the technological market last year and what is shocking the market as of October. What is the secret to their success?

The Oneplus X, Oneplus’s New smartphone. Source: Gizmodo

Well, it isn’t simple. Clearly the Oneplus X is using ‘outdated’ technology now which gives it a manufacturing price advantage, as explained before. But the real magic is in how low Oneplus has made their profit margin, and this is where things start to get radical. The Oneplus X sells for a bottom line price of 250$, and it is believed, shockingly, that the price point of the smartphone is almost the same price as the manufacturing cost. In comparison, a Samsung Galaxy 5s, Samsung’s last year flagship started selling at a price of about 650$ but is actually manufactured for 256$. That gives Samsung 394$ per S5. But this is not their profit margin. Samsung takes a lot of its money and uses it for packaging, accessories for the phone, marketing and logistics. After all that has been added to the cost of the smartphone can it add a profit margin, which is still quite substantial. In fact, the price of the Samsung S5 has dropped significantly to as low as 400$. That means that Samsung took a profit margin of at least 250$, and considering how many phones were bought, well, let’s say Samsung made some big bucks.

Now given that the manufacturing price is 256$ and given that the lowest price of an S5 is now about 400$, that means 144$ was spent on packaging, marketing (something Samsung spends a lot of money on) and a sliver of the profit margin.

Compare this to Oneplus, who spend a bit to manufacture the phone, a bit of money on accessories and a bit of money on packaging. This isn’t exactly nothing, but it is low. Oneplus’s packaging is monochrome and unsophisticated, designed to be cheap and affordable. Their accessories are a bit more elaborate, perhaps even higher quality than Samsung’s, but it’s still produced for a low price. Apart from that, Oneplus doesn’t spend any money on marketing costs, and has no profit margin¸ or at least an extremely low profit margin. This is assembled into a concise package where absolutely every cost is minimized without majorly reducing quality. But if it doesn’t spend any money on marketing and has no profit margin, exactly how does Oneplus 1) Market its product and 2) Make money (or not lose any)?

As the Oneplus One stormed the Web, specification comparisons were made with other phones, by Oneplus. This was part of Oneplus’s online marketing strategy. Source:  Oneplus.

 

Oneplus’s post-manufacturing business model is where things get interesting. It can be sorted into 3 sections:

The Invite System

OnePlus does gain a small amount of revenue for selling its cellphones, especially it’s higher end models, but actually buying one of these smartphones is very difficult. You see, Oneplus has a special ‘invite’ system for buying its smartphones. How this works is that special codes are given out on through Social Media that allows you to buy the smartphone. The other way to gain a Oneplus invite is to receive it from someone else with the phone. Oneplus ships codes with its smartphones for the owner to give away to friends or family. The idea is to ‘benefit’ from sharing with others. In reality, this system allows Oneplus to carefully control its manufacturing, producing exactly as many phones as needed, nothing more, nothing less, which means no money is needlessly expended.

Social Media Marketing

Oneplus’s marketing strategy is actually quite intelligent. By making a phone so revolutionarily cheap, they attracted the attention of the media and many geeks automatically. The rest was done through Social Media networks and the internet, for free. Pretty smart. Not a penny spent on big billboards or internet page advertisements, unlike Samsung and Apple.

Not actually making any money

It’s all in the title; Oneplus doesn’t actually plan to make money, at least not yet. According to an announcement on the Oneplus forums, Oneplus doesn’t plan to make any money for two years. Instead it is focusing on building up a name for itself through selling quality products for a low price and gradually and discretely monetizing their products. Some of their products, such as their phone accessories and audio products, are actually fairly well monetized, which allows them to earn a small amount of money which they use to pay their workers. Apart from that, Oneplus doesn’t really gain or lose any money, which makes leaves relatively stable.

But Oneplus hasn’t just revolutionized how phone companies work; Oneplus has kick-started a revolution in the smartphone industry, even if they’re primary cost cutting is more post-manufacturing based. Instead of focusing on the best of the best, most major companies have begun to focus on lower end smartphones, making smartphones progressively available for the 2nd word.

A Samsung A series smartphone. The A series is of lower cost and had lower specs, but clearly retains a level of quality. Source: VR-Zone

There is one, final reason for falling technology prices, and that’s consumer demand. People who aren’t exactly ‘making it rain’ mostly try to go cheaper whilst maintaining the quality bracket, and although big companies like Apple and Samsung originally relied on the vast money reserves of the 1%, they’ve recently begun to change direction towards the many. Smart move, considering that smartphone ownership in the Second and some of the Third World is currently spiking. Especially in many Arab countries, smartphones are completely replacing computers and becoming their only and primary computational devices because it’s more affordable, more durable, more portable and more flexible than a desktop or a laptop. Hence, there is a greater consumer demand in these countries, and companies aim to please. Imagine an assembly-line worker in China or Taiwan owning the product that they so tirelessly make every day. It’s becoming possible. By next year, 2 of the 7 billion people on Earth will own a smartphone, and that’s coming from only 300 million smartphones sold in 2010.

So the next time your laptop or smartphone ‘mysteriously’ breaks, or maybe it really is time you upgraded from a chunky laptop or an indestructible Nokia brick, be open-minded. Look at the grand plethora of options in front of you and have confidence knowing that more money doesn’t mean better quality. Don’t be an Apple genius, an Android geek or a Windows Elitist. Be practical. What do you really need?

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