About 285 million smartphones were shipped in the first quarter of 2014, according to Strategy Analytics, and more than a billion will ship this year. Not cellphones—smartphones. Samsung and Apple accounted for almost half of them.
The business is staggeringly lucrative. The research firm iSuppli rips apart smartphones to figure out what the materials cost. iSuppli estimates that the materials in an 16-gigabyte iPhone 5S cost $191, though the product sells for $649 without a contract with AT&T or Verizon. The iPhone 5C materials come in at $166, selling for $549 without a contract. The Samsung Galaxy S5 contains $251 of materials.
But we're not buying chips and glass. What we pay for is the experience of the look, feel and touch—for the software, operating system, graphical user interface and apps. Samsung and most of the other 85% non-Apple smartphones use Android, which Google provides free, making up for Android development costs by selling boatloads of search ads.
Apple thinks that its software is, unlike Android, worth more than free. The company filed the patent suit against Samsung and HTC to slow down Android's development, but also to try to maintain the value of Apple's code-writing that provides all the magical features. But it has been seven years since the iPhone was introduced. Commoditization, when consumers realize that your product is no different from what your competitor sells, is creeping up. When personal computers began, they sold for $5,000. Google now sells a laptop for $249. The same downward price pressure is about to happen with smartphones.