The maturing U.S. handset market continued to chug along in the first half of the year – though slowing relative to years past – and analysts offered an array of views on what forces will shape the market in the second half of the year.
Most agreed that smartphone pricing – enabled by a few, high-profile carrier subsidies – has brought those devices within reach of mainstream consumers in an effort to ignite the nascent data market and amass high-spending subscribers.
Whether the carriers see tangible benefits from their subsidy-related investments – AT&T Mobility has said, for instance, that its subsidies for Apple Inc.’s iPhone would affect earnings for two years – may determine whether they extend substantial subsidies beyond one or two halo products, analysts said. And in a scrum involving smartphones and feature phones in the $100 to $200 price point, unsubsidized handset models could leave some vendors out in the cold.
Market slowing
Strategy Analytics has forecast two trends for the U.S. market. Negative 2% growth in the first half of the year will give way to flat to 1% growth in the second half, a slight up-tick constrained by the market’s maturity and its sluggish economy. A slowing replacement cycle is part of the result, according to Neil Mawston, analyst at the firm.
Mawston sees smartphone wars looming as smartphone pricing entices mainstream consumers and blurs the distinction between smartphones and feature phones. In that clash, American subscribers will continue to buy devices based on price, then style, brand and features, Mawston said. That process may favor Apple and Research In Motion Ltd., whose users exhibit high data usage, especially if the latter’s devices are blessed with aggressive subsidies.
“Carriers are battling for those high-ARPU customers – the most succulent fruit,” Mawston said.
But in a mature market, carriers are likely to slice consumer demographics and pursue more granular segments than simply consumer vs. enterprise, said Mark Donovan, analyst at M:Metrics. The trick for carriers, the analyst said, is to figure out how to extract value from different types of subscribers. That means winning over existing data users and increasing awareness and usage among others.
Driving ease-of-use in the user interface is one method to achieve that, Donovan said. So is offering unlimited data plans that reduce subscribers’ uncertainty over their monthly mobile spend.
Smartphones to dominate
Analyst Daniel Longfield at Frost & Sullivan concurs on the rise of smartphones and predicted the demise of feature phones in developed markets, due to the mainstream pricing of the former.
In fact, Frost & Sullivan has forecast that within 6 years, by 2014, 70% of all handsets in the world will be smartphones. Feature phones will represent replacement cycle upgrades for subscribers in emerging markets, Longfield said.
“Now the prices (for the two categories) are ridiculously close,” Longfield said.
“It’s clear that there’s a mainstream appetite for smartphones,” Donovan agreed. “When you hit a sub-$200 price, it broadens the appeal and even allows for impulse purchasing.”
Just as the original iPhone launch last year at $500 and $600 prompted talk that it would help reset a sense of value for smartphones and contribute to higher ASPs, this year’s iPhone 3G launch and AT&T Mobility’s aggressive subsidies that brought the price down to $200 and $300 have lowered the pricing bar, Longfield said. Palm Inc.’s Centro device, priced at $100 at Verizon Wireless and Sprint Nextel, is an extreme example of the trend, he said.
Subsidies for some
In the big picture, the source of Americans’ continued spending on handsets is something of a mystery, as the housing crisis hit the U.S. before it hit Europe, yet the latter’s handset market contracted sooner, according to Kuittinen.
“The million-dollar question is whether U.S. consumer spending on handsets will continue through the second half of the year,” Kuittinen said. “Are they more willing than their European counterparts to shrug off their economic woes and keep spending?”
The issue may depend on whether U.S. carriers see a financial benefit in continuing aggressive handset subsidies, the analyst said. If carriers detect a slowdown in consumer spending on handsets or data plans, they may pull back on subsidies. The domino effect kicks in, with subscribers then holding off on upgrading their handsets, and handset volumes suffer.
And if the carriers calculate that massive subsidies for their top, halo products represent a significant gamble and won’t extend those subsidies across the portfolio, those vendors with high-end devices priced above $200 may be hung out to dry. Those vendors could include RIM and Motorola Inc., both of which are due to make high-end device splashes later this year, Kuittinen said.
Mawston agreed that a smartphone battle could hurt the former market leader here.
“Motorola’s domestic stronghold in the U.S. has been in play for about 18 months,” Mawston said.
Motorola’s market has plunged from 44% in the second-quarter of 2006 – at the height of Razr-mania – to perhaps half in the second quarter of this year, two years later, according to Strategy Analytics data. Mawston expects forthcoming data on the second quarter to show Motorola, Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. closely vying for dominant share, with each in the low 20%s, and RIM and Kyocera Wireless Corp. chasing them.
Carrier subsidies based on ROI
Subsidizing devices down to $200 or less – as AT&T Mobility does with iPhone 3G, as Verizon Wireless does with the LG Dare, as Sprint Nextel is doing with Samsung’s Instinct – only makes sense as long as carriers see resulting growth in subscriber numbers and data revenue, according to Kuittinen.
“Vendors who can’t win subsidies will face trouble,” Kuittinen said. “Every operator has one or two high-end phones with big subsidies. Will they extend those subsidies to other models?”
The whole high-tier handset market shifted in June and July, the analyst said, when the Instinct launched at Sprint Nextel, iPhone launched AT&T Mobility and the Dare launched at Verizon Wireless.
“It has become a fascinating year,” Kuittinen concluded.
