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Reality Check: Mobile broadband – No contract? No problem

Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
Contract plans came to dominate the wireless industry in the United States (unlike the rest of the world) largely as a way to ensure carriers recouped the high up-front cost of subsidizing cell phones. Over the past three years, these economics have grown more acute. The rapid adoption of higher-cost smartphones have driven larger up-front investments even as network costs (and, as a result of competition, monthly service revenues) drop as they are amortized over more subscribers, minutes and megabytes.
But mobile broadband is a different animal altogether. Mobile broadband devices are far simpler than handsets: no keypads, LCDs, touch screens or moving parts. As a result, the up-front investment is far lower and dropping. At maturity and scale, simple mobile broadband devices (like 3G USB modems) will likely cost large carriers $30 to $40 apiece – an order of magnitude less than the most sophisticated smartphones.
The lower the up-front cost, the less suited the device is to a contract plan. Over time the subscriber count arms race will drive prepaid carriers to lower mobile broadband average selling prices and the lure of a free device will be insufficient to compel subscribers to sign 1- or 2-year contracts.
In this hypercompetitive environment, contract carriers need to consider more creative alternatives for mobile broadband devices. Companies could, for example, offer free devices to existing subscribers with bolt-on data plans; for new subscribers, they could bundle mobile broadband devices with smartphones. Carriers also need to strike a balance between the consumer mobile broadband channel and the important wholesale channel where many business customers are served.
Over the long term, mobile broadband access devices will likely evolve just as Ethernet Network Interface Cards and early Wi-Fi adapters did. These devices were initially sold as standalone accessories to connect the large installed base of desktop PCs to local area networks. Eventually, however, ubiquity, standardization and cost competition led to their functionality being incorporated natively onto the motherboard. Similarly, standalone mobile broadband modems have emerged to connect the large installed base of laptops to 3G networks. In fact, 3G functionality is already beginning to show up in mobile computing devices like the Kindle, and the iPad 2. As mobile computing evolves beyond the PC era, smartphones,tablets, netbooks and the like will increasingly incorporate native 3G/4G connectivity – and eliminate the need for a separate mobile broadband access device.
Pure-play mobile broadband OEMs will need to innovate to outrun extinction. These companies will need to move quickly down the 3G cost curve and rapidly develop 4G products and modules that can be embedded in next-gen mobile computing devices. They must also expand into new markets like M2M. And, most importantly, they must control their cost structures – because as the competition intensifies, only the fittest will survive.

Bill Reilly is a Principal in the Software, Electronics & Services business group at PRTM. He has 20 years of operational experience in technology-based industries including leadership roles in engineering, product management, distribution and planning. He has extensive experience in supply chain management for the electronics and telecommunications industries including planning, design, evaluation, benchmarking, and restructuring. Bill holds a BSEE from Lehigh University, an MSEE from Drexel University, and an MBA from the University of Chicago.

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