Device pricing akin to buying airline tickets: Strategy nearly impossible for

It’s easy to see the carriers’ logic in dropping the online price of handsets in the holiday season: fire sales attract consumers in droves. Mentioning “free” to an American consumer is like waving a red cape at a snorting bull.
At other times of the year, such as the closely watched last couple of post-holiday weeks, however, a mixed pattern of price increases and deep discounts on various models poses a bit of a mystery. Is there a secret formula?
Carriers do not publicly discuss handset pricing strategies, vendors defer to the carriers and analysts are loathe to name names or get too specific. Otherwise, as Roger Entner at Ovum put it: “My sources dry up.”
But analysts do say that multiple factors affect carriers’ decisions on how to price the handsets in their portfolio: the drive for year-end or end-of-quarter subscriber additions; the effort to keep existing subs from churning; reaction to competitors’ pricing schemes; the sales pattern of a particular model; excess inventory; and an attempt to obtain volume discounts with vendors.
Online retailing is a less-expensive path to customer acquisitions and offers better tracking capabilities, accentuating the bewildering price scenario.
Discounting to juice up holiday sales is common across retail, but this holiday was somewhat different in that the mobile handset retail landscape in the United States became particularly brutal. Free was rampant and $50 bought numerous models of phones that used to cost as much as $200. Many models were offered for nothing beyond a signature on a two-year contract. (Will signing bonuses be next?)
Analysts are watching to see if a pricing pattern emerges in the post-holiday period and what that pattern will be-particularly as average selling prices continue to erode profits across the board. Fourth-quarter unit shipments may set records, as in Motorola Inc.’s case, but profitability is slipping across the board. (This may also be due to a cooling in mature markets with high ASPs and continued momentum in developing markets marked by low ASPs.)
Meanwhile, the two weeks following Christmas offered little more than seemingly inexplicable price gyrations that underscore the complex mix of factors that apparently drive handset prices.
Between Jan. 1 and Jan. 8, for instance, T-Mobile USA Inc. dropped prices on Samsung Electronics Co. Ltd.’s t609 to free from $50 and its carrier-branded Sidekick 3 to $200 from $250. The carrier raised prices on four models: the Samsung t619 rose to $40 from free (where it had been throughout the holidays), the Samsung t629 rose to $100 from $50, the Motorola v195s crept up to $30 from $20 and the carrier-branded Dash rose to $200 from $150. Cingular Wireless L.L.C. discounted the LG Electronics Co. Ltd. CG225 to free from $10 and dropped the Nokia Corp. 6102i to $10 from $50.
See the pattern? (Hint: there is none. See story and chart on page 4 for a complete listing of carrier changes in the last week.)
“The art of pricing handsets is a bit of a mystery,” said Miro Kazakoff, analyst with Compete Inc., which measures online, wireless shopping behavior. “It’s much like watching the stock market. It’s easy to read a lot into incremental price changes. In fact, the changes look arbitrary due to the range of factors involved.”
Because handset pricing is a critical factor in attracting and retaining subscribers, carriers “keep their cards close to their vest,” Kazakoff said. The result may appear random and baffling to the consumer.
The online medium in particular aids carriers to track actual sales, according to Ovum’s Entner.
“They track on a daily, perhaps even hourly basis how many handsets get ordered,” Entner said. “Online is the most responsive tool for tracking sales.”
Excess inventory or proximity to a quarterly target might lead to a price cut, while popularity of a handset might lead to a price hike, Entner said. Hitting a certain sales volume, which could trigger a volume discount from the handset vendor, may also trigger a price cut.
“There’s a lot of interplay between six or seven factors” that determine seemingly inexplicable price changes, much as in the case of airline ticket prices, Entner said.
And the upshot for the industry overall?
“This causes people to not realize that these are sophisticated devices that cost hundreds of dollars to manufacture,” Entner said.
Carriers also use their control over handset prices to play handset vendors off each other, Entner added.
Vendors eager to meet carrier requirements are welcomed and those that insist on maintaining their value proposition with relatively high prices-perhaps including Apple Inc. and its new iPhone-may find the sledding a bit tougher.
In general, Asian vendors are more pliant in meeting carrier demands than Euro-centric ones, Entner said. But he didn’t name names.