GECON200-Topic #2 Smartphone Demand and Supply

As the whole world seems to know by now, Apple recently placed the new iPhone 5 on sale for $199 with a new 2-year contract. Without a contract, you can expect to pay far more for the phone. Nokia, Motorola, and Samsung–makers of Windows and Android phones–have also been anticipating the release of the new iPhone. As Apple is very secretive about the makeup of their phones, other manufacturers can only speculate on what the new phones will include before the actual release. However, there are many features that non-Apple phones include that make them attractive in comparison. Could these other manufacturers actually reap some benefit from the release of the new iPhone? Think about integrating your answers into the supply-and-demand framework used in our class.

You would have to think that all these manufacturers and platforms are basically selling their top of the line phones for an identical price, but I ask you to dig a little deeper. Much of the real money in the smartphone market is actually paid to the wireless carries like Verizon Wireless, AT&T, Sprint, and a number of other smaller carriers in the form of monthly subscriptions to data and wireless plans. These carriers pay large subsidies to the phone manufacturers in order to secure units and a place in line with the manufacturers. There are arguments to be made that doing away with the subsidies entirely might help lower phone and plan prices, while helping to accelerate innovation in the smartphone market. Comparing the prices paid for phones and wireless plans in other countries is one way to look at this. While competition could bring the overall price down, maybe people are willing to settle paying a little less up front, with higher costs on the back end.

Finally, I’d like you to think about the markets for the suppliers for the iPhone and other smartphones. Hundreds of different components go into each smartphone, and when suppliers have trouble manufacturing enough parts, Apple often has to delay production of the entire phone. Each iPhone that has been released has faced the same problems. Why don’t manufacturers like Sharp and LG simply increase overall production to meet demand? Should Apple wait until they have enough product on hand that they don’t have to create long lines to get their product? Or do you think Apple likes to play on the hype of the new phone to increase the buzz around their product. Are there raw resource constraints that prevent Apple from producing as many phones as they expect to sell at a given price?

Questions you might answer
Might you expect to see an overall increase in sales of other brands of smartphones in the overall market due to the release of the new iPhone? Could Samsung (the leading Android retailer) and Nokia (the leading Windows phone retailer) reap some benefits? By ‘market’ you should be referring to Supply/Demand/Price/Quantity and you can differentiate between different types of phones. Try to think deeper than just “This will lead to a decline in Samsung’s demand” which doesn’t really say much. Do you expect other firms to change their prices, and if they do, what should be the impact on their firm? What has happened to the sales of other phones in the U.S. and abroad around the time of the last iPhone releases?

In the market for the inputs for the iPhone and other smartphones, why do these shortages occur? Chip, screen, and other part manufacturers struggle to meet the demand for their goods. Explain why they cannot simply raise prices.

Why do manufacturers try to create hype or buzz for their products? Do you believe long lines for products leads to the feeling of exclusivity, or do others feel left out and simply turn to a competitor? Are there examples of where this strategy have not been played so successfully?

The smartphone market is highly differentiated, with Windows, Android, and iOS devices ruling the market. Only a few short years ago, a little company called Research in Motion was cruising along selling millions of phones with similar buzz. Try to find old articles on their products to see if you can find the point at which their products no longer had the cache they used to. What can the current market leaders do to maintain their grip on the market–if they can?

Do you think that innovation has been stifled because of the way your purchase of a new iPhone or other smartphone is subsidized by the wireless carriers? Should carriers or the government get involved to try and improve this market and possibly increase innovation?

14 thoughts on “GECON200-Topic #2 Smartphone Demand and Supply”

  1. The effect of subsidies on smartphones by the wireless carrier distorts the true cost of the device. When combined with data plans, fees, and contracts, the carrier can expect to make up the money by the end of the contract but the subsidy itself is still binding to everyone involved (the wireless carrier, manufacturer, and consumer). This hidden cost is often very unclear to the customer, leading them to believe that smartphones are relatively cheap and trapping them in a two-year contract. These contracts create an even larger problem because they lock the customer into the service and phone for a definite amount of time while technology continues to improve, blocking innovation. If the device were to be unsubsidized and separated from the provider, the initial cost of smartphones would definitely be high but people would have the freedom to buy the phones and services according to their needs and budget, without being bound by a contract. Without the subsidy, consumers may have a higher regard for the technology and understand exactly what they are paying for, while the service providers and device manufacturers would be forced to compete on the open market to meet the consumer’s needs.

    http://www.foxbusiness.com/technology/2012/05/22/are-carrier-subsidies-hurting-innovation-and-driving-up-mobile-phone-costs/
    http://money.cnn.com/2012/02/08/technology/iphone_carrier_subsidy/index.htm
    http://money.cnn.com/2012/02/08/technology/iphone_carrier_subsidy/index.htm

  2. The smartphone market is highly differentiated, with Windows, Android, and iOS devices ruling the market. Only a few short years ago, a little company called Research in Motion was cruising along selling millions of phones with similar buzz. Try to find old articles on their products to see if you can find the point at which their products no longer had the cache they used to. What can the current market leaders do to maintain their grip on the market–if they can?

    Five years ago, Research in Motion was dominating the smart-phone market. With the Blackberry phones, they had created a product that was widely used in businesses. It allowed for users to check their email on their phones and made texting more popular, thanks to its built-in keyboard. Since 2008, RIM’s stock has dropped 90%.
    From the beginning, RIM marketed their products toward business and government markets. In the past, companies would often provide their workers with smartphones. But nowadays, people purchase their own smartphones. Consumers are now dictating what technologies businesses use. Apple has done well by offering many updates and new products, providing their consumers with countless options. In comparison, RIM has failed to keep up with their pace.
    Without an emphasis on apps, social networks, and other consumer-targeted features, Blackberry phones have lost appeal especially compared to android and iOS phones.
    Current market leaders are in a similar position that RIM was in several years ago. It is not unlikely that Windows, Android, and iOS will face similar challenges in the future. With rapid new developments in technology and many changes in how people use and interact with these developments, it is difficult to predict how the market will look years from now. These companies must have the foresight to understand the changes they need to make in order to keep up.

    http://www.newyorker.com/talk/financial/2012/02/13/120213ta_talk_surowiecki
    http://www.forbes.com/sites/haydnshaughnessy/2012/04/02/why-rims-failure-could-be-your-failure-too/
    http://www.forbes.com/sites/adamthierer/2012/04/01/bye-bye-blackberry-how-long-will-apple-last/
    http://tech.fortune.cnn.com/2012/05/30/rim-2/

  3. With the release of the iPhone 5, Apple has been experiencing a struggle between supply and demand. Apple’s Vice President of Marketing, Phil Schiller, testified that “each generation of the iPhone sells approximately as many units as the combined sales of all previous generations,” proving that demand for the new phone is inevitable; the problem lies within lack of supply. Sharp is one of three suppliers of the newly improved iPhone screen, but they have had to delay production due to manufacturing difficulties, causing a shortage of screen supply for Apple. Many of the iPhone components are also produced in the northern industrial region of Japan, which has yet to fully recover from the March 2012 earthquake and tsunami. Although these companies have anticipated the demand for iPhone 5 release, they have been unable to manufacture and produce enough iPhones’ to equal demand. These companies simply cannot raise prices to meet demand needs because as parts increase, the overall price of the iPhone will have to increase as well for Apple to make a profit. Since Apple has not increased the price of the new iPhone, there is little incentive for these companies to use all of their resources to produce more of the good without an increased gain. In my opinion, Apple should not have created so much buzz about the introduction of their new product before they obtained enough product to meet demand. Although loyal Apple consumers will patiently wait for their postponed iPhone deliveries, many consumers may choose to purchase Nokia, Motorola, or Samsung phones instead, causing Apple to lose business due to their need for “hype” before they ensured supply would equal demand.

    http://blogs.computerworld.com/smartphones/20923/apple-iphone-5-faces-supply-constraints-consumer-attitudes-change
    http://www.ictransaction.com/201103/japan-earthquake-affecting-global-electronics-industry-chain.html
    http://www.bgr.com/2012/08/31/sharp-iphone-5-screen-production-delayed/

  4. In the market for the inputs for the iPhone and other smartphones, why do these shortages occur? Chip, screen, and other part manufacturers struggle to meet the demand for their goods. Explain why they cannot simply raise prices.

    Perhaps one of the most recognized events of the year is the anticipation of the new iPhone 5. Sure, Apple has produced several remarkable products over the years, but the iPhone 5 is the latest and is equipped with abilities ranging from a new 4 inch screen to credit card capabilities that will be known as, “iWallet.” With such futuristic characteristics, it is clear to see what all the hype is about. Unfortunately, Apple may experience a delay in production. There are many chain partners that contribute to the input factors of the iPhone. These companies include LG Display, Japan Display, and Sharp. However, over the years, Sharp has had difficulty meeting the demand for their goods. According to Jonny Evans, Sharp is behind due to, “problems ramping up production of screens made using the technology since earlier in the year.” The problem is that the new iPhone 5 is expected to have a new 4 inch glass cover, placed on top of a LCD screen with touch functions. In the past, the iPhone had a glass cover with two screens under it, one with touch functions and one LCD. This added feature compromises the speed at which the screens can be supplied. When the factors of input and productivity decrease, but there is an increase in demand, a shortage may occur. Manufactures cannot raise prices because an increase in prices will cause a decrease in the quantity demanded. Not to mention, increasing the price will have no affect on the efficiency that chain partners can produce factors of input for the iPhone 5, such as the screen. At the moment, the technology and ability just is not there to produce the screens any faster.

    http://www.techspot.com/news/49995-sharp-production-delays-may-lead-to-iphone-5-shortages.html
    http://blogs.computerworld.com/smartphones/20923/apple-iphone-5-faces-supply-constraints-consumer-attitudes-change
    http://worldnewsresource.com/sharp-shipment-shortages-suggest-iphone-5-release-date-delay/4500/frank-little

  5. We all believe that manufacturers try to create buzz about their products so that more people will buy their product, but is that all there is to it? The short answer is No. The truth is that companies hype-up their products so that they can sell more of the product but also so they can keep customers away from their competitors. If the manufacturer can artificially inflate their product’s demand, they can, possibly, lower the demand for their competitor’s product. They can also get customers interested in their products quicker and make the customer feel like they “need” to have the product. If the customer believes that they must have the product, they will be more likely to purchase it, and certainly more likely to stand in line for hours.
    Long product lines only lead to a feeling of exclusivity for those who are lulled into “needing” the product. Many consumers, especially those who are shy or don’t like crowds, will not just go to the competitor but they will run to those products, and never come back. Then again, some people actually love the ability to sit and wait for the product and actually use it as an opportunity for entrepreneurial exploits. One example of Over-Hype for a product is Window’s Vista. The product was hyped to be so much better than Windows XP but it flopped, miserably. Creating a buzz could lead to significant sales or it could lead to a miserable flop, depending on the product itself.

    http://www.businessinsider.com/overhyped-product-failures-2011-7?op=1

    http://smallbusiness.chron.com/build-hype-25968.html

    http://www.shaanhaider.com/2012/04/iphone-5-building-hype.html

    http://www.theatlanticwire.com/technology/2011/10/how-long-people-waited-be-first-line-buy-apple-products/43355/

  6. While many believe that the subsidizing of smartphones by wireless carriers hinders innovation and significantly increases the overall cost of the phone to the consumer this is simply not the case. In actuality subsidies from wireless carriers actually increase innovation and only slightly increase the overall cost to consumers of smartphones. The low cost of the subsidized smartphone is one of the main reasons consumers purchase them. If wireless carriers suddenly decided to stop subsidizing smartphones it would be reasonable to imagine that many consumers would be turned away by the sight of a suddenly $400 – $500 more expensive phone. It’s also a fallacy to believe that the contracts for these unsubsidized phones would go considerably down as the overall number of purchasers of smartphones would go down. This would lead the wireless providers to only slightly reduce the amount per month of each contract, thus not saving the consumer much money at all. If subsidies from wireless carriers were ceased, then not as many consumers would buy smartphones which would directly lead to a loss of profit from the makers of these devices. With less money in the pot for the makers of these devices there would be a much slower rate of innovation in the smartphone field as there would not be as much money to allocate in research and development into new technologies. Overall, subsidies from wireless providers allow smartphones to be sold at a price where consumers are comfortable buying and fuels the innovation for wave after wave of technological advances in the smartphone field.

    http://www.digitaltrends.com/mobile/are-iphone-subsidies-destroying-carriers/
    http://technews.tmcnet.com/fixed-mobile-convergence/topics/mobile-communications/articles/86384-handset-subsidies-good-carriers-consumers.htm

  7. The demand for the iPhone 5 is so high that suppliers cannot meet these demands. There is a shortage in the input of parts that go into the iPhone 5, and this will shift the supply curve leftward, meaning the supply will be lower. If the demand stays the same, the quantity will decrease and the price will increase in a typical market structure. However, the smartphone industry is an oligopoly, meaning there is a particular market controlled by a small group of firms. In the case of an oligopoly, the suppliers are providing commodity inputs that many firms can supply. Apple receives parts from Sharp, but also other suppliers such as Japan Display and South Korea’s LG Display Co., so they are not completely reliant on any one company to supply parts. Apple can make them bid against each other, which drives down prices. If one of them tries to stick it to Apple during a situation like the present one, Apple can over time shift supply contracts to the others and leave the one trying to take advantage of a situation out in the cold.

    http://blogs.computerworld.com/smartphones/20923/apple-iphone-5-faces-supply-constraints-consumer-attitudes-change
    http://ca.reuters.com/article/technologyNews/idCABRE87U08E20120831?rpc=401&feedType=RSS&feedName=technologyNews&rpc=401
    http://www.investopedia.com/terms/o/oligopoly.asp#axzz27JAx5ejy
    http://economicsonline.co.uk/Business_economics/Oligopoly.html

  8. The demand for a product once released in market isn’t solely dependent on how great or efficient it works, but more on the popularity the general population puts on it for a number of reasons. One huge way this is done is through what the company releases about presales for the upcoming product. Regarding the new iPhone 5, Apple stated that there were two million orders in the first 24 hours. This one fact is very stunning to the market since it was two times as many presales as there was in 2011 for the iPhone 4S. This could very easily persuade many non-Apple users to switch over just because it seems highly popular, thus increasing the demand for iPhone. Another way this is done is through Apple’s supply and price for the new product. Even though the demand is foreseen to increase by 5% more than any previous released Apple phone they only exported 15 million phones, 22 million less then the 4S export when released. This shortage will leave many users craving even more for the iPhone, increasing the demand further. Apple, if purposely selling less then needed, will be able to raise prices as needed to fulfill the demand to supply curve. Mic Wright of Tech Business says it perfectly, “Popularity does not directly correlate to quality…other challengers to Apple’s dominance are not sold as clearly or as effectively.”

    http://blogs.telegraph.co.uk/technology/micwright/100007720/why-apples-boring-iphone-5-is-selling-fast-while-smarter-phones-arent/

    http://www.benzinga.com/news/12/08/2851774/iphone-5-to-launch-with-limited-supply

    http://www.forbes.com/sites/timworstall/2012/09/03/apple-v-samsung-corporate-cultures-and-design/

  9. Research in Motion or RIM essentially invented the smart phone. Like many other technological innovations of the past, such as the telephone, computer, and internet, the smart phone found its start in the business world because the technology was too expensive for the average consumer. As technology became cheaper to produce these products made their way from the corporate market to the consumer market and with this transition the technology was tailored to this new market as well. These technologies eventually became staples in our social lives and the same is for the smart phone. However; the mistake RIM made was that even though their smartphone was now on the consumer market the technology (meaning its interface and functions) essentially stayed the same without adding any innovation. Once iOS and Android phones started showing up they outsold RIM’s phones because they could do everything a Blackberry could (email, SMS, IM, voice) and an app store over thirty times the size of the Blackberry market. In a nutshell Apple and other companies just had more to offer and RIM was way too slow catch up. Will the same thing happen to iOS and Android? It may eventually if technology somehow radically changes but that will not likely happen for a while. The companies that produce these smartphones have been innovating and offering more features every year so as long as they keep up with the tech they should stay on top for a while.

    http://www.newyorker.com/talk/financial/2012/02/13/120213ta_talk_surowiecki

    http://www.nytimes.com/2010/07/26/business/26views.html?ref=researchinmotionltd&moc.semityn.www

  10. Research in Motion, or RIM, is the company that designs Blackberry smartphones and tablets. So why is RIM so unknown by many, when their product ruled the smartphone market just a few years ago? About six years ago, smartphones and their buyers were concentrated only in the business world. Their technology for the time surpassed almost all other phones, and it also surpassed the need for most cell phone users of the time. The problem was that as technology increased, as well as the ability for the average individual to work such technology, RIM failed to keep up. Android and iPhones recently became accessible for most individuals, and both seemed more user-friendly for those who wanted a phone that was as much a toy as it was a phone and a web device, versus the corporate-like Blackberry. So by September of 2008, just 3 months after Apple released the iPhone 3G (3G was something Blackberry was nowhere near then), RIM stock plummeted from 106 to 39, and has continued to shrink to the current stock of 6.94. To save itself, the company has cut spending, including 75% of its work force, and has hired two new top executives to put the company back on track. Along with these self-fixes, a rumor has started that Microsoft may buy out the company. Many see this as a sensible next move because both companies could gain from the other; it could provide Microsoft with valuable technologies and products, could be tremendously beneficial in their attempt to catapult into the smart phone sector and challenge Google and Apple, and it would save RIM from having to completely shut down. So even though RIM may have lost favor in the smart phone world now, this will probably not be the last the smart phone market sees of them.

    http://seekingalpha.com/article/294662-rim-may-never-recover-but-microsoft-should-take-it-over
    http://online.wsj.com/article/SB10001424052970203806504577178613315961848.html
    http://finance.yahoo.com/echarts?s=RIMM+Interactive#symbol=rimm;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

  11. With 57% of buyers choosing Samsung over Apple for a first time phone, Samsung is the second leading mobile phone seller. “Most young people always want the top end spec devices and cannot always afford an expensive overall contract that comes with the iPhone,” while a Samsung phone can be purchased “on a modest contract with no charge for the handset.” So why is Samsung not the best seller? While Apple has a longer waiting time, due to shortages in production, Apple has a higher battery backup and a longer living time. Apple smartphones are held by a person for an estimated 22 months, above the average 19 months, while Samsung was only 16 months becoming more replaceable than RIM and Motorola. Apple also creates a buzz much larger than the other companies, by releasing a price and shipping date, along with the highest quality features. The other leading competitors, Nokia and Google did not release either of these on their most recent products, while RIM released their information too early and then made people wait so long that they became uninterested. The future is undetermined who will be the more profitable though. For Apple, “If it’s like the previous phones it will be a solid product but at this stage of the game smartphones are converging on commodity status where all of them will pretty much do the same functions.” “One of the reasons Apple has done so well with the iPhone is that it protects users from the biggest threat out there – their own lack of technical knowledge.” People are becoming more reliant on this style of a phone and “the average user doesn’t want to deal with learning a new operating platform.” With more than one- third of cell phone sales in the U.S., and over $700 in stocks, it appears Apple will remain ahead, but for how long?

    http://www.splatf.com/2012/09/phone-pricing-availability/
    http://www.iphone5talk.com/
    https://www.npd.com/wps/portal/npd/us/news/press-releases/pr_120206/
    https://www.npd.com/lps/SmartphoneTrackPR/
    http://forum2.mobile-review.com/showthread.php?104657-Android-most-popular-among-first-time-buyers-in-Q4-says-NPD
    http://www.techrepublic.com/blog/cio-insights/apple-iphone-5-will-fend-off-the-pack-but-for-how-long/39749425

  12. Supply and demand are simple words to describe the complex interactions that lie at the heart of economics. Although many people think of them as simple ideas (i.e consumers want the good, so the demand increases, or more units are being produced, so the supply increases), supply and demand are multifaceted topics.
    Recently, the iPhone 5 was released. Generally, Apple uses old technology and perfects it such as the addition of 4g, which has been out for over 6 months on other phones. Old features usually turn customers away, but for some reason the iPhone 5 has the highest demand of any phone currently on the market. Surveys suggest that current android users are 2.4 times more likely to switch to iPhones and 87 percent of iPhone uses plan on buying a new iPhone within 6 months (1). So, why is the demand for the iPhone 5 so high? Apple has, in essence, perfected the demand aspect of the supply and demand curve. They have created a brand community, which allows the customers to identify with other creating common ground and a sense of camaraderie (2)(3). Now that people feel included, they feel the need to keep up with their fellow users and purchase the newest iPhone. By utilizing basic a basic psychology principle, inclusion, and a perfected system that is user friendly, Apple has created demand that will not see significant declines for many years to come.

    1. http://mashable.com/2012/09/23/iphone-infographic/
    2. http://www.livescience.com/6391-apple-obsession-science-ipad-fanaticism.html
    3. http://www.cnn.com/video/#/video/tech/2012/09/21/intv-iphone-why-buy-butron.cnn

  13. In the smartphone market, Apple has proven a force to be reckoned with selling 4 million iPhone 4S’ in the first three days of its release. The question is how does the effect of the new iPhone 5 release influence the entire smartphone market? According to Greenwich Consulting firm, “Apple’s introduction of new iterations of its iPhone have not historically been shown to have much effect on Samsung shipments. The company overtook Apple in smartphone shipments last year, 2011.” This is due to several factors. Apple’s strategy has been to have one phone with different iterations steadily being released, which is usually accompanied by some new feature that leaves you awe-struck. These groundbreaking innovations are usually accompanied by a high price tag, $200 contracted with most carriers and $650 dollars retail from Apple. This was never a problem in the past for Apple because demand for the newest iPhone always outweighed the supply; this continued to present day with iPhone 5 pre-sales inventory selling out within one hour of release. One major issue that presents a problem to Apple’s iPhone 5, while considered a strong improvement with a longer screen, better camera, and 4G speed, is that it lacks an inspirational new feature. The Samsung Galaxy offers a larger screen, the Motorola Droid has more than double the battery life of the iPhone 5, and the Nokia Lumia offers wireless charging. This leads into the other major factor of simply more smartphone market competition. The biggest threats to Apples’ smartphone market share are Samsung and Nokia from a handset standpoint and Google from a platform standpoint. Samsung, using Google’s OS, offers a wide variety of smartphones ranging in price and performance. As the smartphone market grows, predictions of 192.4 million users in America by 2016, the high price of the iPhone and lack of new feature will have consumers looking for substitute. This is evident in the market share breakdown of operating systems with Google OS claiming 55.4% and Apple claiming 33.4% of the market as of present day. Overall the competition between Apple and the rest of the market will continue to increase smartphone sales because of the increased number of competitors, new technological innovations, and the ever-growing smart phone market size.

    http://beta.fool.com/twillyd/2012/09/11/apple-bringing-new-iphone-competitors-bringing-hea/11726/
    http://www.forbes.com/sites/karstenstrauss/2012/09/20/iphone-5-not-likely-to-affect-samsung-shipments-report/
    http://reviews.cnet.com/8301-19512_7-57511658-233/iphone-5-opens-the-door-for-nokia-samsung/
    http://blogs.computerworld.com/smartphones/20923/apple-iphone-5-faces-supply-constraints-consumer-attitudes-change

  14. The seemingly infinite success of Apple’s series of iPhones is destined for failure. The iPhone appears to be losing innovative momentum. In the past releases of the iPhone, there have large jumps in the functionality and performance of the new phone. The iPhone 4 introduced a new voice recognition system and increased the processing power by 7 times. On the other hand, the iPhone 5 appeared to be an attempt to catch up to the current market by introducing 4G, which has long since been available for other competing phones. The iPhone may even have failed at properly catching up. The majority of smartphone including Android and Windows phones have a data sharing software called Near Field (NFC). This allows them to transfer data just by putting the phone near a device that also has NFC. This allow users to share picture, music, or other data, pay bills instantly, or even interact with NFC enabled displays. By not including NFC in the iPhone 5, Apple may have set themselves back.
    How will they recover? Maybe they can just include NFC the next time they release a phone. The problem with that is that the frequency of the iPhone releases cannot even compare to the frequency of Android or Google releases. While it takes 6 months to a year to come out with a new iPhone, Android can innovate and release a new phone in much less time. Apple may not need to be beat by one company or even for one reason, but the combination of all of their faults and the ever increasing competition may lead to their demise.

    Sources
    http://www.inc.com/john-brandon/will-the-apple-iphone-5-be-an-epic-fail-for-business.html
    http://www.techradar.com/us/reviews/phones/mobile-phones/iphone-4s-1031754/review
    http://www.techspot.com/guides/385-everything-about-nfc/

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