The global smartphone market has just recorded its weakest third quarter in 14 years, and the culprit is not a lack of demand. Shipments fell 20 per cent year on year in the July-to-September quarter of 2026, according to preliminary estimates from Counterpoint Research — the lowest third-quarter total since 2012. The worrying part for the industry is the speed of the slide: shipments fell about 6 per cent in the first quarter and 11 per cent in the second, before the decline nearly doubled again in the third.
AI data centres are taking the memory phones need
Every smartphone depends on two kinds of memory chips: DRAM, which handles the device’s working memory, and NAND flash, which stores photos, apps and files. The companies that manufacture those chips have increasingly been sending their capacity to AI data centres instead, because data-centre customers pay far more for the same silicon. Counterpoint analyst Shilpi Jain had already warned back in April that the market’s decline was being driven mainly by memory makers prioritising AI data centres over consumer electronics — and in the third quarter, that squeeze tightened sharply.
As DRAM and NAND prices climbed, memory took up a larger share of each phone’s bill of materials, and Counterpoint says some brands saw major disruptions to their shipment plans. Makers have passed much of the cost on to buyers: global retail smartphone prices have risen by roughly 20 per cent since the start of 2026. The same AI build-out is driving demand for new high-bandwidth optical networking inside data centres, underlining how completely the industry’s supply chains now revolve around AI infrastructure.
Budget phones are being squeezed hardest
The pain is not shared evenly. Budget smartphones sell at low prices with thin margins, leaving their makers little room to absorb more expensive components: they must either accept smaller profits or raise prices in the most price-sensitive part of the market. Premium models, by contrast, can pass higher costs on to customers far more easily, and manufacturers are responding by pushing buyers towards more profitable high-end devices, increasingly sold on the strength of on-device AI features. It is another side effect of the AI boom, much like the hidden risks researchers have flagged in AI health advice: the costs surface far from the data centres that caused them.
Few companies feel the contradiction as directly as Samsung Electronics, which sits on both sides of the trade. Its semiconductor division benefits from higher memory prices, while its mobile division pays more to build every Galaxy phone it ships.
What happens next
Analysts see little relief while AI investment continues to absorb memory capacity, and with server demand still rising, phone makers may face elevated component costs well into 2027. For shoppers, the practical effect is already visible: higher prices, fewer aggressive budget launches, and longer gaps between upgrades. The smartphone did not fall out of favour in 2026 — it was outbid for its own parts.
Sources: Counterpoint Research figures reported by Gizbot and analysis from Aju Press.
