Design on success: Carriers, handset makers show design collaboration essential for success

Editor’s Note: This article is an excerpt from RCR Wireless News’ May Special Edition, “Enabling the Mobile Revolution: Mobile Chips, Devices and Accessories.” The 80-page special edition is available here.
The wireless industry is a complicated organism that despite serving nearly nine out of every 10 people in the U.S. is still a mystery to most. While wireless carriers continue to spend billions of dollars marketing the coverage and capability advantages of their wireless networks, the numbers continue to show that from a consumer perspective what’s more important are the devices that they can use on that network.
All carriers continue to strut out new devices in an attempt to lure consumers into signing on the dotted line. Carriers have gone back and forth on this over the years, at one point emphasizing the robustness of their network, while at others, pushing the hardware.
Just how much influence do wireless carriers have when it comes to the shape, size and specification sheet of the devices that represent so much to their bottom line? Well, that level of cooperation depends on who you ask.
“It really depends on the carrier,” noted Avi Greengart, research director for consumer devices at Current Analysis Inc. “I don’t think many tier-two operators have much pull in these relationships. But at the same time, I don’t think AT&T is telling Apple how to design the iPhone.”
Greengart’s example of the relationship between Apple Inc. and AT&T Mobility is indeed considered one extreme of the relationship between handset maker and carrier, but has become a model many are looking to follow as the relationship has proven fruitful for both parties.
Apple clearly has been a leader in terms of hardware design in the technology space. Whether it’s its laptops, personal computers, MP3 players, the iPhone or the recently launched iPad, Apple basically sets the standard for design.
Greengart noted that the AT&T/Apple relationship in regards to the iPhone is unique, but added that while AT&T probably has little say in the physical design of the iPhone, it does have input on how the device accesses the network.
“Apple has to make sure that what it puts into the iPhone is compatible with what AT&T’s network can deliver,” Greengart explained. “Apple does not want its customers to have a bad experience with their device so they do work closely with AT&T on what features and functionality will be embedded in the iPhone.”
Fast follower
HTC Corp., which only a few years ago was considered nothing more than a niche maker of Microsoft Corp. Windows-powered bricks, has become one of the fastest growing smartphone makers in the business.
“For HTC it’s been an evolution,” said Jason Mackenzie, VP of sales and marketing for HTC. “When I first started at HTC, we were coming out of an ODM background in the 2005 time frame. We would come with ideas and work with the carriers on their portfolio. Today we are more of an OEM and a leading OEM in design. There is now a constant dialogue with our carrier partners in where they want to go. It’s no longer just a specific meeting, but more of a rolling process.”
Mackenzie noted that the close relationship with carriers was evident in a recent product launch with T-Mobile USA Inc.
“A great example of that cooperation was in developing the MyTouch with T-Mobile,” McKenzie said. “We brought that product to them and they fell in love with it, they just loved the design. They came back and said maybe we could add one more button for search. We were open about that, thought it was a great idea and were able to integrate the search button into the device at launch.”
Another product HTC said it collaborated closely with an operator on was with the Evo 4G device, which was unveiled at the recent CTIA event. The device is set to launch with Sprint Nextel Corp. this summer and is the first mobile phone to include support for the carrier’s WiMAX network.
Sprint Nextel noted that having access to its WiMAX network embedded into the new device opened up a whole range of new innovations that could be included in the design of the smartphone. As such, during the unveiling of the device, Sprint Nextel CEO Dan Hesse touted many of the Evo 4G’s multimedia functions and features, including the device’s 4.3-inch touchscreen, HDMI output support, front-facing camera and a kick-stand that flips out to enable users to watch content with the device sitting on a flat surface.
“We saw the Evo 4G as a way to take the best of our network capabilities and combine it with the best of what HTC does,” said Sprint Nextel spokeswoman Michelle Mermelstein.
Mermelstein added that Sprint Nextel is very proactive in working with its handset partners in bringing devices to market that can take advantage not only of the carrier’s growing WiMAX network, but also of its legacy CDMA2000 1x EV-DO Revision A network.
“You don’t walk into a Sprint store and see a row of silver clamshell devices,” Mermelstein noted “That’s not what we do.”
Analysts have noted that Sprint Nextel’s emphasis on devices, and more specifically the Evo 4G, is important to the carrier’s efforts in turning around its flagging operations.
“Sprint’s new 3G/4G handset is a milestone in the mobile industry, and could help Sprint slow and even stop its subscriber losses,” said Mike Roberts, principal analyst at Informa Telecoms & Media, in a recent report. “It could also give Sprint an edge in attracting and retaining high-value smartphone customers, although every operator is targeting that segment, including AT&T with the iPhone. Sprint is still losing postpaid subscribers at twice the rate of Verizon and AT&T, and devices like the HTC Evo 4G will be key to retaining and attracting customers.”
Bottom-line collaboration
Beyond the design of devices, Gerry Purdy, principal analyst with MobileTrax, noted that pricing issues are of utmost importance to both carriers and handset makers.
“It’s almost a bake off,” Purdy explained. “Carriers are saying ‘what can we get these handsets guys to do at certain price points. That is still a big deal for consumers, even more so than the monthly costs. The price of a device is all about disposable income.”
Purdy noted that the iPhone is a great example of this dynamic. When initially launched in 2007, AT&T Mobility and Apple were selling the device for $400 and $600 with a two-year contract. The pricing was not considered too out of line as at that time a number of handset makers were beginning to pressure carriers to price their devices at a higher level to provide both a good return for both parties as well as to train customers to get used to paying an appropriate price for a feature-rich device.
However, only a few months after the launch Apple dropped the lower-priced 4GB model and moved the higher-end 8GB model from the $600 price point to $400. This led to dramatically increased sales going into the holiday season.
The following year Apple and AT&T Mobility completely reset the pricing model for smartphones when it launched the 3G model at a subsidized priced of $200 for the 8GB model and $300 for the 16GB model. This not only boosted sales, but completely shot initiatives by other device makers in their attempts to re-price the smartphone space.
The new pricing also had the caveat that the required data package was bumped from $20 per month to $30 per month. This helped AT&T Mobility offset some of the additional subsidizing needed for the new device price point with additional revenue over the life of the customer’s contract.
“When they dropped the price of the device, AT&T raised the monthly data fee $10 per month getting $240 extra on the contract. That gave them th
e ability to support that lower price point,” Purd
y said. “Consumers did not even seem to mind the additional $10 per month because they were getting the device for so much cheaper.”
Devices to the rescue: When it works
The launch of the iPhone exclusively in the U.S. via AT&T Mobility is seen by nearly everyone in the mobile space as a watershed moment that changed nearly every aspect of business as usual. Sure, there were other devices that seemed to capture the minds and pocketbooks of consumers like Motorola Inc.’s Razr from the middle of the last decade, or even Nokia Corp.’s 5000-series candy bar-style phones from the late 1990s, but the iPhone was the first device to drastically underscore how much carriers would have to rely on the devices that they sold.
By the time the iPhone launched in mid-2007, mobile carriers had just come out of a drastic period of industry consolidation that had left four nationwide operators standing. One of those left was Cingular Wireless, which in early changed its name to AT&T Mobility shortly after its parent company SBC Communications Inc. closed on its acquisition of AT&T Inc.
During the first quarter of that year, Cingular added nearly 1.2 million customers, which was slightly greater than the number added by smaller rival T-Mobile USA and well below what its main rival Verizon Wireless was attracting. Analysts were expecting more from Cingular as Sprint Nextel at the time was hemorrhaging customers and many thought Cingular would see a benefit.
But, by the third quarter of that year, and with a full quarter of iPhone-fueled growth under its belt, AT&T Mobility managed to pace the industry with 2 million net customer additions. The carrier has since maintained that torrid pace, often leading its rivals in customer growth and pushing now No. 1 operator Verizon Wireless for overall leadership in the industry.
When it doesn’t work
A prime example as to how the relationship between carrier and handset maker has not worked can be seen by Palm Inc.’s current troubles. The company made a big splash last year when it unveiled its new WebOS platform and corresponding Pre device at the Consumer Electronics Show. The device and operating system garnered accolades from industry observers and was seen as Palm’s rebirth.
However, the company pinned its hopes on an exclusive launch agreement with Sprint Nextel, which was in the midst of its own operational challenges at the time. Some hoped that the two beleaguered companies would be able to drag each other out of their doldrums, but alas that wasn’t to be. While Sprint Nextel has managed to at least temper its customer losses as of late, Palm has struggled to find greater adoption of its devices despite a recent expansion to Verizon Wireless and cut-rate pricing. Palm was forced to put itself up for sale earlier this year after posting disappointing sales of its devices and recently found a buyer in computing giant Hewlett-Packard Co., which agreed to fork over $1.2 billion for Palm.
The fluid taste consumers have shown in handset designs, unless we are speaking about anything made by Apple, and overall competitive nature in the carrier and device ranks means that neither party can rest on its laurels when it comes to designing devices that will attract the eye of consumers.