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Thursday, December 09, 2010

Falling smartphone prices = problems for operator control?

Conventional wisdom has it that operators are looking forward to smartphone prices dropping, and it means they will need to spend less on subsidy to acquire and retain customers.

Leaving aside the likelihood of iPhones continuing to stay at the top of the range, it's certainly becoming true that the lower end of the Android device range, as well as Symbian, Bada and BlackBerry, are falling precipitously, already in some cases to below $150-200.

Now while there will always be the tech enthusiasts wanting the ultimate 2GHz, super high-res screen, OS version 9 smartphones, it's possible that Joe or Joanne Average will be happy with something with a decent browser, fairly responsive screen, OK camera, good Facebook client and a screen big enough to watch kittens doing backflips on YouTube. Some will want a QWERTY

That price point is likely to reach $100 in the not-too-distant future. At that point, the world changes a bit. It's a discretionary purchase, like a new shirt or a pair of mid-range trainers, or a nice meal. It becomes subsidisable down to zero by a whole host of companies, not just mobile operators who want to pad out their ARPU with repayments from a thinly-disguised consumer credit loan.

And this will bring some interesting issues - especially whether  people continue to opt to buy the "operator-ised" version of phones, or end up getting them "vanilla" via Amazon or (almost) free with their breakfast cereal. You'll certainly get smartphones given away free with other purchases - maybe "Buy a new Samsung TV and get a Samsung Android Remote Control Smartphone free!!!".

At the moment, about 50% of the world's phones go through mobile operator-controlled channels. But a higher % of smartphones take that path, because they tend to be predominantly bought by post-paid customers, often bundled with a subsidy or a fixed "plan".

As smartphones become more accessible to prepaid users or basic SIM-only conract customers (who usually buy phones for "full retail" price, or re-use an old handset), there becomes less incentive to get them through the operator channels.

This then means less incentive to get the operator software-load (own-brand apps, appstores, connection manager / offload client etc). Coupled with Apple's reluctance to let operators customise iPhones, this is likely to mean that operator "control points" will, in a growing % of smartphones, be relegated to the SIM card or the network, unless the telco can persuade users to download their branded clients and install/configure them.

As I'm writing this, I just received a  press release from ST-Ericsson about hardware platforms for the growing demand for dual-SIM phones. They will *obviously* be sold as vanilla devices as well.

At the moment, most of the world's unlocked phones are low-end devices for voice/SMS customers.

What's unclear is what happens when there's a large enough population of unlocked smartphones as well, with 3G and WiFi and lots of memory. What applications and user experiences go viral? Will we see auto-tethering and connection-sharing emerge? Wide use of a cool new VoIP service? Content-sharing? Applications which work out how many minutes / GB you've got left at the end of the month, so they can resell them or share them with your friends?

The bottom line is that lower phone prices might lead to a reduction in subsidy expenditure by operators. But ultimately this may just further erode control over the user as well. If a phone only costs $100, why would you buy it from someone who takes a strict line in telling you how you may use it?

3 comments:

Dan Young said...

As 'IPisation' continues then the mobile industry moves towards the same horizontal market division we now see in fixed comms. Operators can only use delay tactics to maintain vertical integration and the direct relationship with the end user.

Liberation of advance handsets from operator shackles would be another factor that accelerates that journey.

Tim Deluca-Smith said...

Dean -

I ran some desk research last month about the Average Selling Price of smartphones over the last 24 months(before and subsidy is applied). You can find it here.

http://www.wds.co/enlighten/average_selling_price/WDS_2010_Average_Selling_Price.pdf

Mobile Media Guru said...

Very interesting article. It could happen, but it does discount the face that the carriers and their affiliates in the US have thousands of retail outlets, and due to subsidies, their handsets/devices can hover around $0 to $99, even for quite high-end devices. Further, their advertising power is huge (VZW is over a $1B/year correct?) Therefore, Joe Average is just going to hit those venues in far greater numbers than the alternatives.

In terms of real device costs, if the barriers to getting devices approved for the networks dropped significantly (no PTCRB for example, just FCC), and the really cheap (Asian) producers ironed out their IPR situations so they wouldn't get impounded at the docks, then, we might see some really cheap devices in the US outside of the carrier controlled or influenced channels. But right now, the most secure way for OEM's to be able to offer low prices is via the lower-risk large volumes that the carriers can offer and that no one else can. The only way I can see that evolving is if Best Buy, or Walmart decided to start placing orders directly for these handsets. That might happen.
Having said that, the problem will still be the monthly fee - why pay a large monthly fee if you don't get the benefit of a subsidized handset. The government could step in and require carriers to split the monthly fee into a service + loan fee so that users with their own phones would be able to pay less per month or we might see bulk purchasing MVNO's like Simple Mobile succeeding - or maybe the aforementioned retailers will do it themselves.

So, I agree, cheaper smartphones could be a game changer, but it'll take someone as big as the carriers to do I think.