The rise of the $400 smartphone—you want how much for a flagship?

For a long time, the cost of a fast, high-end smartphone with the latest technology seemed definite. You were paying $600 or $700 no matter whether you did it up front or spread out over the course of a two-year carrier contract. This doesn't have to be the case today, however. There's an exciting new category of phone on the block—the "cheap flagship," a phone that has flagship or very-close-to-flagship specs but only costs around $400.

We're talking about devices like the $305 Xiaomi Mi 5, the $380 LG Nexus 5X, the $400 Nextbit Robin, the $400 Moto X, and the $329 OnePlus 2. These phones all shipped with the best (or close to the best) SoC at the time, beautiful screens, and the usual set of features. If you didn't have a sheet of spec tables in front of you, you'd likely have a hard time pointing out the differences between these devices and a $700 flagship. Cheap flagships might not be at the absolute bleeding edge of capabilities, but they all aim for "good enough."

Consider the current state of the big $700 flagships from companies like Samsung and LG. These super flagships are bloated with tons of occasionally nice to have but mostly unnecessary extras. They are the very best they can be, because in the fight to entice customers to upgrade every year, these companies throw in every bell and whistle under the sun. Samsung is the king of this—the Galaxy S7 Edge has a curved AMOLED display, a heart rate sensor, waterproofing, a magnetic field generator (for Samsung Pay), and an outrageously high 500+ PPI display. It even doubles as the heart of a virtual reality gaming system. The LG G5 has a laundry list of extras, too. There are two rear-facing cameras, a color spectrum sensor, another overkill 1440P display, and a modular accessory system.

But usually at a flagship Samsung or LG launch event, price isn't even mentioned. We typically have no idea how much these devices cost until carriers put them up for sale. The message seems to be that these are super-luxury items and money is no object—don't worry about the price. Compare that to the launch of a Xiaomi or Nexus device. Price is not only mentioned, it's usually marketed as a major feature of the device.

One of the earliest examples of a high-profile cheap flagship was Google's Nexus line. In 2012, Google started selling the GSM Galaxy Nexus directly on the Play Store for $400 unlocked and off-contract. Since then nearly every Nexus launch (save the Nexus 6) had a model at the $300 to $400 price point. Add in some quick software updates, and the Nexus line won a lot of fans among Android enthusiasts. For a time, there were whispers that Google must be subsidizing the phones. But now, we're seeing other manufacturers meet this price point and pick up the mantle of "bang-for-your-buck" phones.

The name of the game when you're building a cheap flagship isn't just cost-cutting, it's about finding ways to cut costs in ways users won't miss. The "value-added" features listed above are usually the first to go, and the OEMs focus instead on good specs and quiet competence. The display usually gets dialed back to 1080p, which still gives you a 400+ PPI on a 5-inch screen (the iPhone 6 is 325 PPI). And when the cheap flagship is done right, it also includes the latest extra features that customers care about and will notice—things like a fingerprint reader, NFC, and USB Type-C.

Since these cheap flagships offer much of the power and important capabilities of the more expensive flagships, they often cannibalize the sales of more expensive flagships. Currently, manufacturers that build something for this evolving market usually fall into the "nothing to lose" category—they simply don't have a high-end device to cannibalize. Google had no smartphone sales at all, so it was fine undercutting the competition with $300 and $400 smartphones. Motorola picked up the price point when it was under Google ownership, and it has (so far) continued under Lenovo's rule. Newcomers Xiaomi, Nextbit, and OnePlus had no established market presence to consider either.

Why are more companies jumping onto the cheap flagship bandwagon? One reason is the rise of "emerging markets." Developing countries like China and India are reaching the point where everyone wants a smartphone. Given the massive population—those two countries have a combined 2.6 billion people—smartphone vendors are starting to target those areas for expansion. Generally, these markets are more sensitive to pricing than other smartphone-heavy countries. So for most vendors, the easiest way to target these new users is to bring prices down.

Analyst firm IDC lists Xiaomi as the top-selling vendor in China for 2015, and its devices have an average selling price of $141. Huawei is in second place for market share, and its average selling price is $213. If you happen to have the most valuable brand on Earth, though, you can still charge a premium and do well. Apple occupies the number three spot in China and has an average selling price of $718. But most brands are not the most valuable brand on Earth, and Apple is also the only vendor for iOS, giving it a truly differentiated product. Everyone else is just reskinning Android.

Here in the United States, the death of two-year contracts and the smartphone subsidy will probably put the price of smartphones more front-and-center in consumers' minds. The big four carriers have all recently backed away from two-year contracts. The result is two options—a monthly payment plan or paying full price—that more directly reflect the cost of a new smartphone. Two-year contracts used to hide the cost of devices with across-the-board higher monthly bills and early termination fees. With the new payment plans, your monthly bill changes depending on how expensive your smartphone is.

Take the current cheap iPhone—the iPhone SE—on Verizon, for example. The two options are paying the full price of $399.99 or paying $16.66 a month for 24 months (which most customers can easily figure out is still $399). Previously, a two-year-old iPhone that occupied about the same price bracket would have been listed as "free with two-year contract."

Some carriers only really dumped the two-year contract in 2016, so this is a recent development. With most customers still on a two-year contract, the change hasn't widely affected buying habits yet. With the option of a higher monthly bill or paying full price going forward, I'd imagine customers will start paying more attention to the true cost of a smartphone.

For now, Xiaomi is probably the standard-bearer for the "cheap flagship" movement. That is, at least if you live in one of the countries where it operates. The company expertly cuts costs in places where most customers won't feel it, while including features they care about and mostly keeping up in the spec race. Consider the freshly launched Xiaomi Mi 5. For $305, you get the very latest SoC from Qualcomm (a Snapdragon 820), but Xiaomi uses a lower-binned version of the SoC. "Product binning," if you're not aware, is the process of categorizing CPUs (or another integrated circuit) based on how well they survived the manufacturing process. Some CPUs can handle higher frequencies than others, while others have small but not fatal defects in sections of the chip that can be disabled to create lower-end parts.

On the base model, Xiaomi's lower-binned Snapdragon 820 has a CPU that runs at 1.8GHz instead of the usual 2.15GHz, and the GPU drops from 624MHz to 510MHz. It's a small change that won't affect performance much, but Xiaomi probably saves a bit of money by picking up these slightly slower Snapdragon SoCs.

If you don't want to deal with a lower-binned CPU (or want a more comparative spec), there's the Mi 5 Plus, which has a Snapdragon 820 that runs at the highest frequencies. That phone is still only about $350.

Xiaomi's cost-cutting doesn't just stop at specs, though. The company also saves some money by sitting on the sidelines of the Western world's patent wars. The company doesn't do business in every country—its main stomping grounds are its hometown of China and other "high population countries" like India, Indonesia, and Brazil. By staying away from the West, Xiaomi has so far managed to avoid the Smartphone patent wars. In countries like the US, for instance, just about everyone involved with smartphones is suing everyone else.

Apple used its arsenal of iPhone utility and design patents to wage a "thermonuclear war" on the competition for many years, though it has grown a little less litigious in the post-Jobs years. Microsoft has taken a licensing strategy with its general computing patents, and in 2012 the company announced it was collecting fees from 70 percent of Android devices. Kodak fought off bankruptcy by selling its numerous camera patents to a group of 12 other tech companies, including one with a reputation for being a patent troll (companies involved in the sale are safe from litigation, but Xiaomi wasn't one of them). Old-guard companies like Nokia, RIM, and Motorola have been around long enough to patent every phone-related function under the sun, and Oracle wants Google to pay it almost $10 billion for its use of Java (which would be the largest copyright verdict ever).

This is all outrageously expensive whether you win, lose, or settle. It's a big headache that Xiaomi has so far avoided. But with a new accessory store in the United States, it seems like Xiaomi is still considering lawyering up and joining the fray.

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