Budget phones are becoming unprofitable. The market is splitting in two.
A shortage of memory semiconductors, stoked by artificial intelligence's voracious appetite for computing power, is quietly redrawing the boundaries of who can afford a smartphone and what that device can do. Budget handsets — long the gateway for billions of people into the digital world — are becoming economically untenable, while premium devices grow costlier and more exclusive. Samsung, uniquely positioned as both chip maker and phone maker, is turning this industrywide crisis into a competitive advantage. The memory crunch is not merely a market correction; it is a structural shift in who gets to participate in the connected age.
- Memory chips now consume up to 64% of the manufacturing cost of entry-level phones, leaving budget makers with no margin to absorb price shocks — they must raise prices or abandon the segment entirely.
- Global smartphone shipments are projected to fall 12% in 2026, with sub-$400 models collapsing by 22%, as Chinese brands like Xiaomi, Oppo, and Vivo cancel launches and slash forecasts.
- Samsung's in-house chip supply insulates it from the crisis that is crippling rivals, allowing it to undercut competitors on price in key emerging markets like India while others scramble to survive.
- Even flagship phones are not spared — Apple is signaling fall price hikes, iPhone 18 users will lose access to AI features due to RAM constraints, and Samsung's foldables are rising by up to $280.
- The shortage is spreading beyond smartphones, with Xbox consoles, gaming PCs, laptops, and desktops all seeing significant price increases as new production capacity remains years away.
The smartphone market is fracturing along a single fault line: memory. DRAM and NAND flash chips, the components that store data and power applications, have become so expensive — driven by AI's enormous demand for computing resources — that the economics of affordable phones are breaking down. For handsets under $400, memory now accounts for roughly 60% of total manufacturing cost. For the cheapest entry-level models, that figure exceeds 64%. With margins already razor-thin, budget manufacturers have no room to absorb the shock. The result, according to research firm Omdia, is a projected 12% contraction in global smartphone shipments in 2026, with sub-$400 models falling by 22%.
Premium phones can adapt — swapping processors, downgrading displays, trimming camera specs. Budget makers have no such flexibility. Chinese manufacturers including Xiaomi, Oppo, Vivo, and Meizu are canceling launches and cutting forecasts. The market is polarizing sharply: devices above $400 are expected to grow 5.7% in shipments, while everything below that threshold is in freefall.
Samsung stands apart. As the world's largest memory chip producer, it supplies its own mobile division through long-term internal contracts, shielding itself from the price volatility hammering competitors. While rivals raise prices, Samsung is holding steady or cutting them in emerging markets. Its Galaxy M47 5G now undercuts Realme's competing model while offering better specs — a striking reversal for a brand once criticized for overpriced budget devices. A crisis for the industry is becoming a market-share opportunity for Samsung.
The premium tier is feeling the pressure too. Memory now represents 23% of flagship phone costs, up six percentage points in a single quarter. Apple has already raised Mac and iPad prices by up to $300, and CEO Tim Cook has signaled fall iPhone price increases. More consequentially, the iPhone 18 will ship with only 9GB of RAM — short of the 12GB required for advanced Apple Intelligence features — meaning non-Pro users will lose access to capabilities like customized Siri voices and improved speech recognition. Samsung's Z Fold 8 Ultra will cost $100 more than its predecessor, with larger storage variants rising by $180 to $280.
Relief is distant. New production capacity will not come online until 2027 at the earliest, and manufacturers are prioritizing high-value AI memory over the legacy chips phones depend on. Even when supply grows, it is expected to fall far short of surging server demand. The shortage has already spread beyond smartphones: Xbox consoles are rising $100 to $150, Valve's new gaming PC starts at over $1,000, and Dell and Lenovo have raised prices across their lineups by 15 to 20%. The AI era's semiconductor hunger is quietly determining which devices people can afford — and which features they can access.
The smartphone market is splitting in two. On one side, budget phones are dying. On the other, premium devices are thriving—but at higher prices. The culprit is a shortage of memory chips, driven by artificial intelligence's insatiable hunger for computing power.
Memory semiconductors—the DRAM and NAND flash that store data and run applications—have become the bottleneck. For phones under $400, these chips now consume roughly 60% of the total manufacturing cost. For entry-level models under $99, the figure climbs above 64%. This matters because budget phones operate on razor-thin margins to begin with. When memory prices spike, there is nowhere left to cut. Manufacturers must either raise prices or stop making the phones altogether. According to research firm Omdia, global smartphone shipments are projected to contract 12% year-over-year in 2026, with models priced under $400 collapsing by 22%. Entry-level phones are already becoming unprofitable.
Premium phones have options. They can switch to older processors, use cheaper displays, downgrade cameras. Budget makers have no such flexibility. Chinese manufacturers including Xiaomi, Oppo, Vivo, and Meizu are canceling product launches and cutting shipment forecasts. The market is polarizing: phones above $400 are expected to grow 5.7% in shipments, while everything below that price point is contracting sharply.
Samsung is the exception. As the world's largest memory chip manufacturer, the company has long-term contracts between its semiconductor division and its mobile division, insulating it from the worst of the price shock. While competitors are forced to raise prices, Samsung is holding steady or even cutting prices on budget models in emerging markets like India. The Galaxy M47 5G, Samsung's latest budget 5G phone, now undercuts the competing Realme 16T while offering superior specifications—a reversal for a company long criticized for overpriced budget devices. Samsung's structural advantage is turning a crisis into market share.
The premium segment is not immune. Memory now accounts for 23% of the total cost of flagship phones, up 6 percentage points in just one quarter. Apple CEO Tim Cook has signaled price increases for iPhones launching this fall, and the company has already raised prices on Macs and iPads by up to $300. More troubling for Apple users: the iPhone 18 and iPhone 18e, arriving next spring, will ship with only 9GB of RAM—a 1GB increase from the previous generation. Apple Intelligence features like customized Siri voices and improved speech-to-text require a minimum of 12GB of RAM. Non-Pro users will lose access to these capabilities. Samsung's new Z Fold 8 Ultra will cost $100 more than its predecessor, with larger storage models seeing increases of $180 to $280.
Relief is not coming soon. New memory production capacity will not come online until 2027 at earliest, and manufacturers are prioritizing high-value AI memory over cheaper legacy chips. DRAM supply growth in 2027 is expected to reach only 20-25%, far short of the 50-70% increase anticipated in server demand. Memory prices will likely remain elevated through the end of 2027. The shortage is already rippling beyond phones: Microsoft is raising Xbox console prices by $100 to $150 starting in August, Valve's new Steam Machine gaming PC starts at $1,049, and Dell and Lenovo have raised product prices across the board by 15-20%. The semiconductor battle of the AI era is fundamentally reshaping which devices consumers can afford and what features they can access.
Citas Notables
The rise in memory costs has become a serious existential threat for budget smartphones. Entry-level products are already becoming unprofitable.— Omdia research report
Standard cost-reduction measures will only have limited effect, making retail price increases inevitable. We expect increases of around $30 in the budget segment and $150 to $200 for some premium flagship models.— Counterpoint Research analyst Shenghao Bai
La Conversación del Hearth Otra perspectiva de la historia
Why does memory cost matter so much more for budget phones than for premium ones?
Because budget phones have almost no margin to absorb cost increases. A $300 phone might have a $20 profit built in. When memory costs spike 22%, that margin disappears. A $1,200 phone has room to absorb the same spike and still be profitable.
So Samsung is just better at managing costs?
Not exactly. Samsung owns the memory factories. When memory prices rise globally, Samsung's phone division can buy from its own semiconductor division at negotiated rates. Competitors have to buy on the open market at inflated prices. It's not skill—it's vertical integration.
What happens to the people who buy budget phones?
They either pay more or they don't upgrade. A $300 phone might become $330 or $350. For someone in India or Southeast Asia, that's meaningful. Or they buy older models. The market doesn't disappear—it just shrinks and shifts upward in price.
Apple seems to be in real trouble with the iPhone 18.
Apple's problem is different. They have the money to absorb costs, but they're choosing not to. Instead they're cutting RAM to keep prices from rising too much. That means users lose features. It's a choice about where to take the pain.
When does this end?
Not until 2027 at the earliest, and probably later. The memory manufacturers are making more money than ever by focusing on AI chips. There's no incentive to flood the market with cheap memory. The shortage will persist as long as AI demand stays hot.
So Samsung wins and everyone else loses?
Samsung wins in the short term. But if the budget market shrinks too much, the entire industry shrinks. That's not good for anyone, including Samsung. The real question is whether this polarization becomes permanent.