Nov. 19, 2006

Holiday prices on mobile handsets in the U.S. market are hitting new lows, driven by carrier subsidies, falling component prices and competitive pressures.

The situation is blurring traditional notions of price tiers and recasting the retail environment, according to Current Analysis.

In the United States this season, low-tier phones are often free, mid-tier feature phones are selling at $50 and the new breed of smart phones—for example, the Motorola Inc. Q, Nokia Corp.’s E62, Research In Motion Ltd.’s Pearl and the Cingular 3125—have fallen in price to about $100.

“Consumers are either price-driven, feature-driven or style-driven, and all those factors are converging at $50,” said Avi Greengart, lead handset analyst with Current Analysis. “This is part of the Razr story.”

Greengart pointed out that current offers from various carriers on Motorola’s Razr handset include a variety of colors and added features, far more than when the phone debuted two years ago. That handset can now be purchased for $50—an example of how the traditional, mid-tier sweet spot has fallen in price.

“Forty-nine dollars is the new ninety-nine dollars this holiday season,” Greengart said. “This makes it awfully hard to sell feature phones above $100.”

Although the overlap of the U.S. mobile industry’s fourth quarter—featuring a final push to make annual numbers—with the country’s gift-giving season has historically seen lowered prices, this season may be different, according to Greengart.

“Now if you have a hit, you can do competition-crushing volume,” the analyst said. “It becomes more difficult for consumers to distinguish between handset choices if one really stands out.”

Greengart pointed to Samsung Electronics Co. Ltd.’s Synch handset at Cingular Wireless, which offers HSDPA speeds and features media controls, a two-megapixel camera, a QVGA screen and removable memory.

In Europe, the handset sells in the $300 to $600 range without carrier subsidies. Today it is $50 at Cingular. Such an offer will effectively blind consumers to feature phones priced at $100 and above, Greengart said.

However, it’s unclear how exactly presumably rising subsidies and falling component prices factor into the equation since wholesale prices and carrier subsidies are not publicly discussed by industry players, according to the analyst.

The upshot? According to Greengart, numerous phone models at $100 and above will be overlooked, except perhaps those with very advanced features or sought-after fashion phones, such as Motorola’s new Krzr.

More broadly, the new pricing environment resets consumer expectations.

It also adds to the erosion of average selling prices, and, specifically, presents a challenge to Nokia, which has offered either entry-level or high-end phones in the United States without exploiting the mid-tier sweet spot that the Razr has reset at $50, Greengart said.

The analyst offered a prediction: “Once the carriers have blown out the fourth quarter, they may reset prices to see if there’s traction among consumers,” he said. “Long-term? This year’s $50 is next year’s zero.”

Source: RCR News