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$49 is the New $99 This Holiday Season
By Avi Greengart
Principal Analyst, Mobile Devices
November 20, 2006
Cellphones are consumer devices, and like other consumer purchases, there are magic price points at which new groups of customers are compelled to buy into a category. The last major price reset for multimedia handsets was in mid-2005, when Verizon Wireless priced Motorola’s E815 at just $99 after rebates with a two-year contract. At the time, we wrote that the E815 would be competitive at twice the price because it moved high end functionality to a mid-tier price point; the E815’s feature set was similar to products that ranged in price from $149 to $3991. With high end features now routinely available under $100, over the past 18 months, “mid-tier” was redefined as a clamshell cameraphone with external screen and often an internal antenna and Bluetooth at the $50 price point. (Prices are for two-year postpaid plans made at a carrier retail store where a clear majority of U.S. consumers purchase their handsets.)
Well, it’s happened again. Due to a variety of competitive factors, Cingular, Verizon Wireless, and Sprint are all offering super-thin clamshell 3G multimedia phones for just $49.
► Sprint was extremely late to the Motorola RAZR party, having just joined late last month. To make a splash, Sprint launched its RAZR at $49. But this is not the original RAZR V3 from 2004; Sprint is offering the Motorola RAZR V3m, which includes an EV-DO modem for wireless broadband speeds, 1.3 MP camera, removable memory, and a GPS location technology. The RAZR V3m can be used with Sprint’s Power Vision service for live TV, streaming video, streaming Sirius radio, and over the air music track downloads. TeleNav can be used for GPS navigation. The RAZR is an iconic design inside and out, and is made with a real metal case, not painted plastic.
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► Cingular launched its revised Cingular Music service with Samsung’s SYNC serving as its flagship. The SYNC is just a tiny bit thicker than the RAZR but is absolutely packed with technology including a 2 MP camera, a huge, gorgeous QVGA (320x240) internal screen, external touch-sensitive music controls, and stereo Bluetooth (A2DP). Cingular’s wireless broadband network uses HSDPA technology which the SYNC supports to watch streaming video, stream 25 channels of XM Radio, or browse the Web. Cingular does not support over the air track downloads, but the SYNC will sync with subscription music services using a PC2. Another option at Cingular is LG’s CU500 – also a super-thin HSDPA clamshell musicphone – which dropped from its previously low $79 price to $49 to stay competitive with Samsung.
► Verizon Wireless had already been bouncing the price of its RAZR V3m around between $69 and $99 since the summer; with the increased competition from Sprint and Cingular, a drop to $49 was inevitable. Verizon Wireless’ version of the V3m has its proprietary user interface which is fine for basic voice, but can be infuriating for more advanced features, such as V CAST Music, which offers over the air track downloads, or V CAST streaming video. Verizon Wireless is touting VZ Navigator as a differentiator in its advertising, and the GPS navigation system is remarkably easy to use and effective.
So, for less than the average monthly cell phone bill, consumers can get a phone that would sell for $300 to $400 – or more – without a contract. Financial analysts will probably want to closely watch what this price war does to the carriers’ cost of customer acquisition, but with two-year contracts and churn at record lows (at least at Verizon Wireless and Cingular), this is a tradeoff that the carriers are willing to make.
High-end phones for around $50 have a broad ripple effect throughout the industry. This resets the definition of “mid-tier” phones down to, well, free, and makes it awfully hard to sell feature phones of any kind above $100. Consumers are more interested in the form factor and style than in advanced capabilities – after all, most U.S. consumers still use their phones as a way to make phone calls – so any handset vendor who doesn’t have a RAZR-like product to offer will have to consider offering it at zero dollars as well, regardless of its multimedia functionality. Independent retailers, who typically pass along a portion of the bounty paid to them by carriers, will have to pay consumers to “buy” a phone.
$49 superphones turn several well worn notions on their head, starting with the chestnut that U.S. consumers are behind Europe and Asia in terms of advanced phone technology. Not only is that false, but with a postpaid commitment, U.S. consumers can now get their QVGA 2 megapixel HSDPA super-thin marvel of convergence for less money than the (prepaid) price of the cheapest monochrome voice-only handsets sold in emerging markets like India. It is true that there are 7 and 10 megapixel cameraphones for sale in Korea, phones with VGA screens – not cameras – in Japan, and smartphones with 5 MP cameras, GPS, HSDPA, and WiFi on the way from Nokia for Europe. However, those sell in the $700 – $1,000 price range; products like Samsung’s SYNC and LG’s CU500 meet or exceed the average featurephones sold in even the most tech-friendly markets. LG’s best selling handset in Korea was a Chocolate phone with “just” a 1.3 MP camera and no removable storage.
Given the changed environment, MVNOs like Helio may need to rethink their business model; they cannot differentiate themselves by selling “high end” feature phones at above $200 and claim technical superiority unless the phones truly are an order of magnitude better. For example, Helio just launched the Samsung Drift for $229, which has similar features as the SYNC, which Cingular offers at $49. On the other extreme, how can Alltel sell the LG AX245 – a perfectly nice VGA cameraphone with Bluetooth it launched this week – for $59, when $10 less at Verizon Wireless or Sprint buys a RAZR?
The impact of these price wars on handset vendors is clear: increasing pressure on wholesale average selling prices (ASPs). Network operators effectively leverage the downward shifts in high-end phone price sweet spots (from $199 in January 2005 to $49 in November 2006) during negotiations with handset suppliers. The increases in data ARPU from 3G services are finally starting to appear – at least at Verizon Wireless – emboldening carriers to push subsidies on devices tied to new service launches. But when carriers bump up subsidy levels to stay competitive with each other, their handset suppliers are expected to take a hit on their phones’ sell-in prices, hence the gradual decline in ASPs. Many in the handset industry accuse Motorola as the primary driver behind these price wars due to its strategic decision to drive the iconic RAZR down 10x - from a $499 high-end exclusive fashion phone at its launch two years ago, to a mainstream $49 phone today. Whether this was a “shoot yourself in the foot” strategy in the long run or not is subject to debate (Nokia has deliberately not followed this approach with its 8800 line). But Motorola’s strategy has helped Motorola resuscitate its brand and gain global market share. Rivals who lack distinctive phones – in fashion, music, or imaging – will inevitably see their brand image deteriorate because price is no longer a competitive tool in the mid-tier and low-end segments.
Even at the entry level, at what point does a consumer say, “You know what? Rather than accepting this entirely adequate free thing, I am willing to pay $50 to get this amazing thing instead.” We’re about to find out, because magic price points are magical for a reason.
This Spotlight is based on the report, “$49 Is The New $99 This Holiday Season,” published November 10, 2006. The full report includes recommendations for Apple, Nokia, Motorola, Sony Ericsson, Samsung, and T-Mobile.
1 “Motorola and Verizon Reshape Industry Price Curve,” July 07, 2005
2 “Samsung’s SYNC is a Great Deal, but Cingular Music is a Mess,” November 8, 2006
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