How Apple Sets Smartphone Industry Pricing 11 comments
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The below is from our principal analyst and partner, David Eller
Conclusion
We believe Apple’s (AAPL) iPhone sets the bar for smartphone pricing. This presents a significant challenge for competitors and carriers alike. We expect accelerating price declines to begin in Q4/2009 and smartphone margin pressure through 2010. Smartphone stocks may not be the 'safe' growth investments many holders expect.
How Apple sets smartphone industry pricing
When Apple set the price of the iPhone 3GS at $199 while reducing the price for the iPhone 3G to $99 it forced the handset industry to adapt. The bar is set for not only high-end phones but also the mid tier, limiting the time handsets can prove themselves worthy of a premium. This has implications for handset manufacturers and carriers that are willing to take risks with cutting edge but higher priced features. Going forward, Apple’s pricing structure has implications for mid tier phones such as the CLIQ and the Pixi, which we believe, need to be priced at $99 and $49 in order to reach mass adoption. These prices are considerably below current expectations.
Carriers have already started responding.
- Verizon (VZ) reduced the price of the Storm to $99 shortly after the iPhone 3Gs and has followed suit with other cuts to $99 or below. Today the only smartphones Verizon is selling above $99 are the Blackberry Tour HTC’s Touch Pro 2, Imagio, and Ozone. Despite the price reductions at Verizon, field checks indicate that August was 8% below plan as the iPhone increased market share.
- Sprint (S) continues to offer HTC’s Touch Pro 2 and Samsung’s (SSNLF.PK) Instinct HD at price points above $199. In addition, our field contacts see weaker post-paid subscriber metrics in the current quarter.
- AT&T (T) offers HTC’s Tilt and Garmin’s Nuvifone at price points above $199 but the Garmin handset with AT&T service is available for $149 via Amazon (AMZN).
As we enter the Christmas season, we expect to see premium handsets offered at a peak of $199 with value and teen focused handsets offered for $99.
Expectations for the CLIQ and Pixi may be too high. Near term, this pricing structure makes us concerned about Motorola’s (MOT) CLIQ and the coming launch of Palm’s (PALM) Pixi. T-Mobile’s CLIQ presales have been at a price point of $199 despite the phone’s clear focus on the teenage market. While we do not have an indication of presale interest yet, conversations with store managers and higher-level industry contacts leads us to believe that a price reduction is likely before Christmas and possibly before Thanksgiving weekend.
Palm’s “Pre lite,” the Pixi, has not yet been priced. However, Amazon sells the Pre for only $99 on Amazon with a 2-year contract. In the UK, the Pre is free with a two-year contract. We believe that in the US, a $49 price point for the Pixi is necessary to gain widespread adoption even if only to compensate for the smaller screen and lack of WiFi.
Going forward margins are likely to remain under pressure. The implications for handset manufacturers are clear, we expect incumbent vendor’s margins will be squeezed going forward. BOM costs for the Palm Pre and iPhone are in the $170 range according to iSupply and we believe the $130 to $150 range for more streamlined devices such as the Pixi.
Handset pricing to the carrier is typically double the cost of manufacturing and distribution, which would price the Pre at ~$450. For the carrier to offer the Pre to the consumers, it would require a $350 subsidy or $14.60 per month assuming a 2-year contract. We are seeing more rapid price declines for handsets, which drive greater subsidies from carriers that have committed to a certain level of units. If ARPU, the source of these subsidies, stagnates, the carriers will in turn pressure the handset manufacturers for concessions on future models driving down margins.
Disclosure: David Eller has no positions in the securities mentioned.
Disclosure: Gerard Hallaren is long Sprint and AT&T wireless bonds.
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PLEASE take the cost of your carrier's plan into consideration when measuring cost of a handset... This lack of consideration probably contributes to the fact that this country has such a problem with debt.
BTW if you are into saving money use a Novatel MiFi2200 on Sprint and then make and receive calls on your iPod Touch. Its what I often do .
On Oct 20 10:44 AM Mackerdude wrote:
> AT&T's high monthly rate seems to always get lost when considering
> the price of the iPhone though. And this has always confounded me.
> Why do "smart" people not factor in the rate of their monthly cell
> phone bill when considering the cost of a handset. If I'm going to
> pay $600 more for a two year contract with AT&T vs Sprint, then
> even if I pay $350 for a new Touch Pro 2 versus the old version of
> the iPhone for $99, that's still a $349 savings by going with the
> Sprint phone. Now people can argue about which handset is better,
> but its hard to argue the cost savings.
> PLEASE take the cost of your carrier's plan into consideration when
> measuring cost of a handset... This lack of consideration probably
> contributes to the fact that this country has such a problem with
> debt.
I agree, Apple has basically sold to all the enthusiasts, to add more share they have to fight in the part of the market where value is as important as "cool". VZ and Droid, if done correctly, will be a strong contender because of the coverage/service aspect. LTE (and WiMax) will change the landscape as fast internet browsing and access will become the most important feature.
On Oct 20 11:00 AM Aryamehr wrote:
> Once again Apple is where it is more because of the incompetence
> of others than its own 'destructive technology.' However, the landscape
> is changing and the competition has woken up. By tethering itself
> to ATT Apple has surely handicapped itself, regardless of how well
> it is currently doing. It is giving the competition enough room to
> breath and continue launching better and better Smartphones. IMHO
> there are already a number of handsets that can easily match, if
> not better, the iPhone in quality and functionality. Case in point,
> HTC's Hero, Samsung's Moment, both being offered at Sprint. Sprint
> also offers a much better 3G network and has a substantially wider
> 3G reach than ATT and T-Mobile combined. The new phones are packed
> with technologies that are far superior to the iPhone 3GS, such as
> AM-OLED screens, better camera's and camcorders, removable batteries,
> faster CPUs, and substantially better hardware. In summary my point
> is that in the latter 3 yrs. Apple has basically had a free ride
> and now it will have to contend with a disparate and desperate group
> of contenders that in many cases will be putting everything on the
> line. Most of them will have the support of Google's Android OS,
> which is Linux based, and is well equipped to emulate anything Apple
> has to offer. On the hardware side Apple basically has no advantages,
> which can be seen in the recent launchings of numerous manufacturers
> smartphones. 2010 will no doubt be a facinating year for both the
> Telcos and the Smartphone manufacturers.
On Oct 20 11:28 AM Aryamehr wrote:
> @Gerrard, when buying a smartphone we like to know that their are
> no hidden charges. Can you compare Sprint's 'Everything Mobile Plan'
> at less than $70/month with ATT and Verizon? I think they are substantially
> lower than the $5 difference you mentioned. Sprint's Everything Mobile
> Plan includes, Voice/Data/Text/email/... to Talk etc for less than
> $70/month. ATT and VZ both offer the same service for almost double
> that of Sprint. Please correct me if I am wrong.
You're dead right. The other handset manufacturers have definitely all produced black and silver rimmed touch screen phones with little app icons that look... just like the iPhone. How original. How innovative. How impressive. It only took them, what, two and a half years since the iPhone launched? Do you think Apple are quaking at companies that take 30 months to produce knock offs? There are counterfeiters in China that can do it quicker.
But all the companies imitating Apple's hardware and all the bloggers praising their rather dull 'achievements' are surely missing the point: it's not about the hardware.
Apple didn't reinvent the smartphone by using black plastic or a touchscreen. You can copy the look of the iPhone but it will never be an iPhone. You can even give your knock-off a 10 megapixel camera, free tethering and a hot-rod processor, but it won't be an iPhone. It's not about the specs.
Why? Because the innovation is the eco-system. The innovation is 60 million handset users all on a common OS X platform. The innovation is the 85,000 apps in the App Store and the 2 billion downloaded. The innovation is underpinning the whole thing with the 100 million subscriber iTunes (for wired updates and local back-ups) and MobileMe (for wired and wireless syncing and cloud back-ups).
If it takes two and a half years to copy a bit of black plastic, how long will it take HTC or Samsung to develop and deploy an iTunes copy and build 100 million subscribers? Don't hold your breath.
Oh, and every Apple handset makes them many times more profit than every single handset competitor. Apple are now sitting on £34 billion in cash (more than even Microsoft!) and in those two and a half years they have spent more on R&D than the others have made in smartphone sales.
There are two types of tech companies: innovators and imitators. It used to be that Apple innovated but the imitators made all the profits. For a decade now, Apple has re-written this equation and is by some distance the most profitable of all its competitors.
It's about time someone gave Apple some proper competition; surely that would be good for all of us? But Sony have lost the plot and Palm are only one bad product away from collapse. Instead of copying Apple's designs, why doesn't someone copy their strategy?
On Oct 20 11:00 AM Aryamehr wrote:
> Once again Apple is where it is more because of the incompetence
> of others than its own 'destructive technology.' However, the landscape
> is changing and the competition has woken up. By tethering itself
> to ATT Apple has surely handicapped itself, regardless of how well
> it is currently doing. It is giving the competition enough room to
> breath and continue launching better and better Smartphones. IMHO
> there are already a number of handsets that can easily match, if
> not better, the iPhone in quality and functionality. Case in point,
> HTC's Hero, Samsung's Moment, both being offered at Sprint. Sprint
> also offers a much better 3G network and has a substantially wider
> 3G reach than ATT and T-Mobile combined. The new phones are packed
> with technologies that are far superior to the iPhone 3GS, such as
> AM-OLED screens, better camera's and camcorders, removable batteries,
> faster CPUs, and substantially better hardware. In summary my point
> is that in the latter 3 yrs. Apple has basically had a free ride
> and now it will have to contend with a disparate and desperate group
> of contenders that in many cases will be putting everything on the
> line. Most of them will have the support of Google's Android OS,
> which is Linux based, and is well equipped to emulate anything Apple
> has to offer. On the hardware side Apple basically has no advantages,
> which can be seen in the recent launchings of numerous manufacturers
> smartphones. 2010 will no doubt be a facinating year for both the
> Telcos and the Smartphone manufacturers.
a family member got a Pre as a gift and when she showed it to me she said 'well, it's ok, but it's not an iPhone'.
And i have to laugh when i hear that some new smartphone has come out with some feature the iPhone doesn't have at the moment. Soooo...do they think everyone is alseep over in R&D at Apple?
Apple will continue to lead the pack and will continue to be the one to copy. It is so not about a phone! Apple just gets it...knows how to integrate technology and humans, so tech feels like part of us, not the enemy.
Long APPL