A savvy Amazon.com shopper can find Sony Ericsson Mobile Communications L.P.’s color-screen T616 camera phone with service from AT&T Wireless Services Inc. for -$150. That’s right: Buyers will actually receive $150 for purchasing the phone.
Is Sony Ericsson giving away its phones in a desperate bid to gain market share? Or is Amazon.com so frantic for sales that it will pay people to shop online? In truth the seemingly ridiculous price is due to a variety of reasons, but the primary factor-which affects most new mobile phones-comes down to carrier subsidies.
According to some surprising numbers from research and consulting firm Yankee Group, U.S. shoppers spent a total of $3.6 billion on mobile phones in 2003. The nation’s carriers, on the other hand, paid $10.2 billion for those same phones. Taken another way, U.S. wireless subscribers doled out an average of $45.58 each to purchase their mobile phones. Carriers, on the other hand, paid handset manufacturers an average of $154 each for those same phones.
The difference typically comes out of carriers’ pockets. The theory is that shoppers will be lured into a wireless contract by inexpensive phones, but carriers will recoup their investments down the road as their newly acquired subscribers pay their monthly service bills. Indeed, carrier subsidies have been a staple of the wireless market in the United States since its beginnings-the cutthroat nature of the business has largely demanded it.
Some have long predicted an eventual decline in subsidies as U.S. carriers look to price phones closer to their actual value. Due in large part to the nature of prepaid wireless services, most of the rest of the world’s wireless subscribers already buy phones at much higher prices. Such a move would undoubtedly please U.S. carriers intent on generating profits. However, the event may not come to pass.
“The operators have been increasingly willing to subsidize advanced phones,” said John Jackson, a wireless and mobile technology analyst for the Yankee Group. “If anything, they’ve shown signs of increasing” subsidies.
The issue hinges on data services. Carriers have long subsidized voice-only phones in an effort to sell voice services, but some saw the advent of wireless data as a way to break the cycle. Carriers tired of undercutting their revenues would be able to reduce their subsidies on advanced, data-capable phones. The theory was that shoppers would see the value in such phones-devices featuring Internet capabilities, color screens and integrated digital cameras-and would pay more to own them.
However, a -$150 price tag on one of the industry’s most advanced handsets indicates that’s not the case.
The real problem with subsidies on advanced handsets is that the return on investment is decidedly unclear, said Yankee Group’s Jackson. Wireless users so far have been reticent in using wireless data services, so carriers are not guaranteed that the funds they invest in subsidies for selling advanced handsets will be paid back anytime soon. And higher subsidies to encourage the sale of additional advanced phones may simply exacerbate the problem.
“It’s a spend money to make money proposition,” Jackson said. “I do see this as somewhat institutionalized.”
However, Jackson said carriers are becoming more flexible in the implementation of their subsidies. In some cases specific phones are subsidized heavily to promote a new service or event, such as AT&T Wireless’ low prices on the NEC Corp. 525 handset in conjunction with the relaunch of the carrier’s mMode data service. Further, wireless number portability and the holiday season may be conspiring to motivate heightened subsidies.
“The level of competition has been intense,” Jackson said.
As the mobile-phone industry continues its frantic march of innovation, there may come a time when carriers feel comfortable in lowering their subsidies. Jackson said camera phones with resolutions above 1 megapixel may present a clear value to customers, prompting them to spend more money on handsets.
“We are moving closer to a point where that value proposition is more obvious,” Jackson said. However, he added, “subsidies will be very, very sticky.”
