Handset subsidies are falling as digital mobile phones gain huge volumes, but as carriers begin targeting new segments and a new cycle of data-enabled handsets come to market, analysts wonder how low carriers can keep subsidies.
The days of 1-cent handsets tied in with contracts appear to be over, never to return, most analysts believe. Duopoly situations years ago required cellular operators to severely lower the price of handsets to entice new customers. Today, competition, handset selection and affordable pricing plans are making the cost of handsets less of an issue.
Some operators like VoiceStream Wireless Corp. are offering handsets to consumers for as low as $30, while the average retail price of most handsets carriers are offering lingers between $100 and $150. Consumers are willing to pay.
“At one time in the industry, [1-cent phones] worked,” said Todd Rethemeier, wireless services analyst with JP Morgan in New York. “Consumers have gotten a lot smarter and look at the service price much more than the handset price today. Handset features are much more important, and people factor in the monthly cost much more than they did a few years ago.”
“The U.S. is trying to crawl its way back to create value with phones,” said Paul Dittner, handset analyst with Dataquest in San Jose, Calif. “Trying to reinstate some sort of value from something that was free is very difficult. All in all, operators have been somewhat successful in doing that.”
While handset subsidies vary greatly by the service provider, which takes into account competitive dynamics of each market, the general trend is toward falling subsidies, say analysts. Nationwide carriers are buying in large volumes. As a result, carriers like Sprint PCS are said to be subsidizing certain Samsung phones for just $62, and still selling the phones for a retail price of $150. Sprint PCS declined to talk about handset subsidies.
“We’re likely to see retail prices staying stable, but the cost of handsets coming down,” said Perry Walter, analyst with Robinson-Humphrey Co. in Atlanta.
Handset subsidies are a substantial piece of an operator’s acquisition costs, and carriers would like to do away with them as much as possible. Thus, they are pressuring handset makers to continually lower prices. Handset component shortages have not helped.
“We went through a period where prices remained stable for a while because of a shortage of handsets,” said Lee Finney, director of new business development with CDMA handset manufacturer LGIC. “Handsets are flowing back into the market, but one thing keeping prices stable is that carries are concerned about getting sufficient quantity for the fourth quarter. The pressure remains, but it’s not as irresistible as it used to be.”
The CDMA handset market, while the most competitive, remains the most expensive in general, said Dittner. Yet, many vendors, especially Nokia, want to grab a larger share of this market and are willing to lose money on certain products in order to develop relationships with new carriers.
Many analysts also hear rumblings of a price war later this year on the low-end handset side spurred by Nokia, the world’s largest handset maker.
“It wouldn’t surprise me that Nokia would look to drive the price down with the 5100 and 6100 models they’ve been producing for a long time and making healthy margins on,” said Dittner. “They would have some room to move on pricing.”
New customer segments, new handsets
Potentially large handset subsidies are a concern for financial analysts. More competition generally brings higher subsidies to users, and the U.S. market gets more crowded every day. Subsidies were a proven tool in South Korea, where carriers significantly slashed handset prices to spur growth and penetration until the government banned the practice June 1.
If carriers want to push prepaid services, a proven growth engine in Europe, they may have to heavily subsidize the handset since the service is targeted at the lower end of the market. This doesn’t sit well with analysts. In the United Kingdom customers purchased prepaid phones in grocery stores and exported them off to other countries because they were so cheap. Carriers lost their subsidies.
Most carriers offering prepaid in the United States subsidize handsets sparingly or not at all and charge a higher rate per minute so they don’t lose money if the prepaid customer churns off their network too early. These factors are a barrier to prepaid’s widespread adoption, however.
“The dilemma is prepaid,” said Dittner. “There’s a trade off. Do you subsidize the handset a bit and make up the difference on airtime charges?”
The lack of volume of WAP-enabled handsets will require more subsidies initially, but analysts believe vendors will produce volumes quickly to bring down prices. WAP royalties are less than $5 per handset and won’t contribute much to cost, said Finney.
However, the poor uptake of WAP services in Europe leads analysts to wonder how much carriers will need to subsidize WAP handsets to drive adoption. Lack of compelling applications, packet networks and handsets remain barriers to heavy adoption of the service in Europe today.
“The question becomes: Will operators subsidize these new features, or will consumers be willing to pay? How will this shake out? It’s not going to be one easy answer,” said Dittner.
