Re: Smartphone Subsidies

Dear Lex Team,

You are wrong about your final analysis leading to "uneasy lies the head that wears a crown". Apple is not just developing the cool hardware but also has a support network of more than 200,000 apps. The likes of Nokia, Blackberry, Motorola etc., may reduce the price-gap but they cannot fill the apps-gap.

The only credible source of support operators can have is by embracing Google's android based phones from Chinese / Taiwanese manufacturers with almost 65,000 apps support to get a foot-hold in the market. Funnily, you don't even mention that in your analysis.

Regards,

Pradeep Kabra

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Smartphone subsidies
Published: July 4 2010 20:13 in Financial Times

Kingmakers do not take kindly to becoming mere courtiers, so insurrection is only a matter of time. For years mobile phone operators played a delicate game, balancing the power of phone manufacturers’ brands against their own control of customer relationships and a willingness to subsidise handsets. While the carriers risked becoming a dumb pipe, the highly competitive handset market left them room to make decent returns.

Then Apple strolled in and grabbed the industry’s profits. As shown by queues snaking round the block for the latest iPhone, the devices attract customers. Returns for the operators, however, are less clear cut. Some estimates suggest that AT&T, the US carrier, does not break even on an iPhone customer until the 17th month of a 24-month contract. In private, European mobile executives will admit that they only just break even on iPhone customer contracts. The hope is that users spend freely on data services and stick around once their terms are up.

Apple, meanwhile, has kept the average selling price of an iPhone above $600 since the third quarter of 2008. That’s for a device that contains less than $200 worth of parts (not including manufacturing, software and intellectual property costs), according to estimates by iSuppli, a market research firm.

Operators’ powers are diminished, not destroyed, though. While they will not stop subsidising iPhones, they are waiting for a credible pretender to rally round. And
non-Apple smartphone prices continue to fall. Nokia’s next model, the N8, will cost €370. BlackBerry maker Research in Motion recently reported that its average selling price slipped below $300 in its first quarter to the end of May, from more than $350 a year ago. Apple has already developed tiered pricing, selling older iPhones more cheaply. But when the technological gap to the competition narrows, Apple’s price premium must do likewise, or its terrific rate of growth will slow. Uneasy lies the head that wears a crown.