Holiday cheer for consumers: How low can third-party, online retailers go?

‘Tis the season to be jolly, especially if you’re a consumer checking out online deals from independent retailers. For instance, Wirefly, the online retail face of InPhonic Inc., is offering handsets at prices that defy gravity.
The Motorola Inc. Krzr, for instance, only hit the market two months ago and now is available on Wirefly for $50-with a series of rebates-with a two-year contract with Sprint Nextel Corp. The handset is $200 with a contract on Sprint Nextel’s site.
It gets better. The Sony Ericsson W810i-the vendor’s latest and greatest Walkman phone-is free (with rebates, naturally) from Wirefly with a Cingular Wireless contract; the same handset is $100 at Cingular’s Web site. The LG Electronics Chocolate also is free from Wirefly with a Verizon Wireless contract; it’s $100 from Verizon’s site with the same contract. The BlackBerry 8700g is also free from Wirefly with a T-Mobile USA contract. T-Mobile charges $250 for the device on its site, along with the requisite contract.
So, what’s going on?
“Carriers typically are close-lipped about their retail channels,” said Julie Ask, analyst with Jupiter. “But in general, carriers pay third parties a bounty for bringing in subscribers. The third parties probably lose money on the handsets themselves, but they can use them as ‘loss leaders’ to attract traffic to their sites.”
According to Ask, carriers’ customer acquisition costs runs in the hundreds of dollars per subscriber and comprise marketing dollars, phone subsidies and other factors. Thus, using third-party retailers to drive net adds is cost-effective, even after paying a “bounty.”
“The model works because these independent online retailers offer a cheaper distribution channel than a brick-and-mortar store,” said Adam Guy, director of wireless research at Compete, which studies online consumer behavior. “It’s a volume play and it provides cheaper marketing than, say, television or billboard ads. Our data shows that independent online retailers pull from the same audience as carriers’ own online retail sites.”
That might raise the question of why carriers’ would enable, even pay, third parties that present better handset deals than the carriers themselves do.
But, according to Ask, third party online retailers complement rather than compete with carriers’ efforts. Ask said her research reveals that third-party, online retailers represent only a fraction of carriers’ online customer acquisitions, thus they represent no threat to the carriers’ ability to use online retailing to acquire subscribers.
“We think third-party, online retailing is a segment that may grow,” she said.