What’s Sinking the Smartphone?

Written by on July 11, 2013 in BillingViews, Opinion with 0 Comments

We’ve seen a rash of stories, like this one from Forbes, that speculate whether the global market for high end smart phones has peaked. Despite the many reasons given for this shift in the market, no one seems to be talking about subsidies.

Pundits are chalking up Apple, Samsung, and HTC’s reported sales declines to everything from a loss of interest among consumers (ho-hum, Smart Phones are sooo 2012); market saturation (i.e. everyone who wants an expensive smart phone already has one); increased competition (even Apple is planning to ship a low-end iPhone in China); or a greater emphasis on apps (uh-oh…what happens when apps threaten to commodotize their hardware…?). While these analyses try to take common sense approaches to shifts in consumer demand, they may fail to consider the classic distribution model for cell phones – a channel sales model in which operators who subsidize the cost of phones are the primary channel. Here’s the problem – operators don’t want to bear the burden of device subsidization quite so much.

The cost of mobile hardware has gone up. The iPhone 5, for example, is reportedly the most expensive phone Apple has yet produced, with a price tag to the manufacturer of anywhere from $167.50 and $230 depending on the model and whose report you believe. Apple sells the device at retail, sans mobile contract, for about $649. With a contract, a consumer pays close to the manufacturer’s cost for the device. Even at wholesale rates, operators are risking several hundred dollars per device for the privilege of being an Apple (or Samsung, or HTC) sales channel.

So, if I’m an operator’s CFO, I’m thinking – wait, I’m trying to make money off of the services I offer via the device. I’m not making bank off the device itself. And since there are basically no exclusives anymore, there’s not much incentive for me to shell out the excess capital to take on the risk of financing new inventory every time Apple (or whomever) adds an ‘S’ or a new number to the end of a marginally upgraded device.

Once I’ve arrived at this mindset I can go a few ways:

1) Change the supply-and-demand curve by purchasing many fewer devices and selling them at retail for a higher price with less subsidy.

2) Offer more BYOD or SIM-only options where consumers can bring any compatible phone they want and I’ll be happy to activate them on my network for a small fee.

3) Sell the devices for full retail prices with no long term contract.

Funny thing is, we’re seeing all of these models enter the market. And, lo and behold, the device guys are whining about sales declines.

So, what does this mean for operators? The market is becoming less about devices and more about services now. Availability of devices is fading as a point of differentiation. This is very good for operators, yet they remain at risk of backsliding into price wars – if not over devices, than over subscriptions and value-added services.

If the analysts are even partially correct that smartphone saturation is contributing to the sales slowdown (and given the explosive growth, it seems they can’t be too far off the mark), then operators need to be smart about where they can take social, sharing, and multi-screen content and multi-device app-based service offerings (which can span anything from card games to home surveillance).

What I’d like to hear from telecom market is a clearer definition, and more creative answers, for how operators can add service-based value in ways that they aren’t today and that device manufacturers and their ecosystems are now failing to do?

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Edward Finegold

About the Author

About the Author: Ed Finegold is CSO for Validas, a company that specializes in personalized user experiences that leverage analytics-as-a-service to simplify mobile buying, selling, pricing & billing. Ed has been a regular contributor to BillingViews. .

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