Rising Smartphone Prices: The Impact of AI and Advanced Technology

Planning to buy a smartphone? Why delaying your decision could cost you more

Smartphone prices are climbing due to the increasing cost of advanced components, 5G technology, and the integration of cutting-edge features like generative AI. The demand for high-end devices with powerful processors and enhanced AI capabilities is driving this surge. Advancements in manufacturing processes and the complexity of software and AI algorithms further contribute to the rising costs.The price of smartphones is on an upward trajectory, driven by several key factors, such as the rise in cost for advanced components, the adoption of 5G technology, and the integration of pioneering features like generative AI. Research from Counterpoint indicates the global average selling price (ASP) for smartphones is likely to increase by 3% in 2024 and an additional 5% in 2025. This surge is primarily due to the rising demand for high-end devices equipped with robust processors and enhanced AI functionalities. The influence of generative AI is particularly significant in pushing smartphone prices higher. As the market shows a growing interest in AI-driven features, manufacturers are channeling substantial resources into developing System-on-Chips (SoCs) that boast improved CPU, NPU, and GPU capabilities. This sophistication in technology inevitably results in higher production costs. "As we enter the AI smartphone era, the integration of GenAI features is expected to continue this upward trend," according to the report. Furthermore, advancements in manufacturing, such as moving to 4nm and 3nm processes, add to the rising prices. These processes allow for the creation of smaller, more efficient chips but require hefty investments in research and development. Additionally, the growing complexity of software and AI algorithms further escalates costs, necessitating greater resource allocation for software development and refinement. Despite potential concerns around climbing prices, the benefits of these technological advancements are substantial. AI-driven smartphones come equipped with innovative features, offering improvements in camera quality and smarter virtual assistants. As technology advances, the next generation of smartphones promises to be even more powerful and feature-rich.

Your new premium smartphone could get more expensive

Premium smartphone prices are projected to rise by at least 5% due to costlier chipsets with advanced AI capabilities, memory, and components. Chipmakers Qualcomm and MediaTek anticipate shrinking profit margins as wafer costs from supplier TSMC increase. Despite facing a lawsuit from ARM over CPU core usage, Qualcomm, alongside MediaTek, plans to pass these rising costs onto consumers.Prices of premium and high-end smartphones are set to get at least 5% more expensive, driven by use of more powerful and complex chipsets for AI use-cases along with more powerful memory modules and other components. Leading chipset companies-Qualcomm and MediaTek-have guided gross margins on mobile phone chipsets to go down in the December quarter due to increasing wafer costs. Taiwanese chipset maker TSMC is raising costs for leading-edge 5nm and 3nm processors that are majorly utilised by smartphone chipmakers. Meanwhile, chipset designer ARM is also raising licensing costs for companies like MediaTek, even as it is embroiled in a lawsuit against Qualcomm for its use of custom CPU cores in its latest generation mobile chipset. Experts believe Qualcomm will likely settle ahead of the hearing in December, with ARM pushing to raise license fees with Qualcomm as well. The chipset manufacturing cost increase may very well be passed down to consumers as chipmakers said it will look to maintain its current gross margins, executives said. "I think our goal is trying to maintain the gross margin within the range, which is 46% to 48%. For next year, in general, I guess that's still going to be our range. We're trying to sell our value and pass down some of the costs to our customers. I think that still remains our strategy and goal," said David Ku, chief financial officer, MediaTek, during a recent earnings call. Industry executives said the latest generation chipsets, set to power high-end Android handsets, are already around 20% more expensive than their predecessors due to a more complex circuitry and advanced manufacturing process. High demand for premium handsets is also contributing to improving the product mix of chipset makers towards more high-end chipsets. "The big story for us has been content increase. We've kind of seen the chipsets becoming a lot more capable. And as those solutions get adopted, we get to see the benefit on the ASP side," Akash Palkhiwala, CFO, Qualcomm, said in a recent earnings call. The executive added that devices priced higher than $400 have gone up from being 21% of the market to 30% of the market, which is benefiting the company's financials. "We launched our new premium-tier chipset, and OEMs are actively taking advantage of it by accelerating their launches and increasing scale of their launches," the executive said. Counterpoint Research in a note said globally, smartphone average selling prices are expected to rise 3% on-year to $365 in 2024, and further to 5% on-year in 2025. "This increase is attributed to several factors including the ongoing transition to 5G technology, enhanced computing capabilities, and a notable shift towards premium smartphones," Counterpoint Research said, adding that rising consumer interest for GenAI in 2025 will drive the trend shift towards more powerful processors, increasing the bill of materials (BoM). "A primary contributor to this escalation is the SoC," the research firm affirmed, adding the costs associated with wafer manufacturing are expected to rise starting in 2025, leading to single-digit percentage increases in price of high-end chipsets from Qualcomm and MediaTek.