Analyst Angle: Is $99 The New $49 This Holiday Season?

Editor’s Note: Welcome to our Monday feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from Jupiter Research’s Julie Ask, iGR’s Iain Gillott and more.

In addition to analytical research, Current Analysis has reams of data tracking pricing, promotions and availability for every handset in the U.S., and around this time each year, I write a report about holiday pricing trends. Two years ago, with the launch of the $99 Motorola E815, the report was titled, “Motorola and Verizon Reshape Industry Price Curve,” and last year’s version was, “$49 Is the New $99 This Holiday Season.” So this year, you’d expect it to be something like, “$29 Is the New $49,” or even “Free Is the New $49.”

Indeed, super thin 3G multimedia clamshells can be had well below $49 with a two year contract during carrier pricing promotions. An extension of that trend is the near complete elimination of the entry level category-nearly every carrier offers a “mid-tier,” rounded clamshell phone with an external CallerID screen and Bluetooth for free at all times. Carriers tell us that these inexpensive phones are still their largest volume sellers overall, and the death of the entry level is worthy of its own column (maybe next month?).

But a funny thing happened on the way to pricing freefall: the re-emergence of featurephones selling in the $49 to $99 range, many of which do not even offer 3G. Instead, these phones focus on a single non-voice feature-either music or messaging.

There are subsets of the market who value simplicity over complexity, but most consumers, when faced with identically priced phones where one device offers a long list of features and the other is comparatively bare bones, will naturally choose the one that crams in the possibilities. After all, if it doesn’t cost more, why not choose the phone that can play music (at least theoretically) and take pictures (that can’t really be used for anything more than phone wallpaper) and play video (that you get onto the phone how, exactly?) and can download data at 3G speeds (that requires a data plan you cannot begin to justify purchasing)? Manufacturers responded with an explosion of phones that have enormously long lists of features that are poorly implemented.

But it turns out that consumers will actually pay more for a phone that focuses on making a limited number of usable features. By focusing the industry’s attention on ease of use and features beyond voice-specifically, music and web browsing-the iPhone deserves a significant share of the credit here. Apple’s marketing budget isn’t hurting things, either (I don’t think there’s a television program I’ve watched in the past six months that didn’t contain an iPhone ad. Either I personally epitomize Apple’s target demographic, or it’s spending a heck of a lot of money in marketing, buying up ad time in every single program on the air). But even at its lowered price of $399, the iPhone is priced out of reach of the mass market, and that opens up a competitive opportunity.

There are three basic approaches to competing with the iPhone:

1. Don’t. Focus on the enterprise buyer instead. RIM and HTC are doing a nice job here with products like the email-centric BlackBerry Curve, and the every-technology-but-the-kitchen-sink HTC Tilt.

2. Build a premium multimedia-centric touchscreen that competes directly with the iPhone. LG’s Voyager coming to Verizon Wireless and HTC’s Touch at Sprint represent this approach today, while, at recent events, Nokia has been showing glimpses of what can only be called an iPhone clone for 2008.

3. Focus on just one element of the iPhone, and integrate that into a lower priced product.

$49 – $99 Music Phones

Music is the obvious element to work on, as the iPhone is closely associated with the iPod/iTunes. Even without the iPhone, vendors would be working on musicphones just to compete with each other; for example, Sony Ericsson has long offered affordable music-centric Walkman phones in the U.S. It is therefore really interesting-and rather sad-to note is that the vendors still haven’t quite gotten it right; none of these musicphones match the most basic combination of 1 – 4 GB of storage and a standard 3.5mm headphone jack found on even the least expensive standalone MP3 players.

Some examples:

$49 – $99 Messaging Phones

The other trend has been a move to QWERTY messaging phones. Here too, the market is split between more expensive smartphones and cheaper featurephones with QWERTY (or non-standard alphanumeric keypads, which I like to call “QWERKY”) layouts. There are slightly pricier options for both music (LG’s multi-million selling Chocolate costs $129) and messaging (prosumer smartphones like RIM’s BlackBerry Pearl) that compete for some of these buyers, but there is a critical mass of purpose-focused products, often with just 2.5G radios, in the $49 – $99 price range. Early examples of messaging phones were quite ugly (I once described LG’s V as resembling a large, flattened pickle), but vendors have put the phones on a diet and there are now several attractive designs to choose from.

Some examples:

*AT&T does not have a QWERTY device in the $49 – $99 price range

What stands out here is the pricing. With the exception of T-Mobile and its Sidekick iD, carriers are subsidizing 12 button handsets more heavily than QWERTY featurephones. Consumers seeking a phone optimized for messaging will happily pay it (perhaps they think they’re paying by the button), but the subsidy disparity doesn’t make sense for the carriers. Basically, they’ve got it backwards: carriers ought to be more heavily subsidizing QWERTY phones to get them in the hands of their subscribers, where they often generate above-average messaging revenues. 12 button handsets, despite 3G and features galore, often generate nothing extra at all.

Avi Greengart is the Principal Analyst, Mobile Devices at Current Analysis, Inc. Avi can be reached at [email protected]