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PHOTOGUIDE: How will the economy affect sales of ‘halo’ devices?: ‘There’s no question we’re seeing the best devices ever at the lowest prices’

Uncharted territory.

It’s a phrase bandied about in many quarters since mid-September, when Wall Street’s facade began to crumble. But it’s particularly relevant to the wireless industry as it heads into the year’s strongest quarter for handset sales and contract renewals.

Make that “traditionally” the strongest quarter.

Though forecasts from carriers and handset vendors have suggested that a seasonal, sequential bump may come this quarter, many players have also projected that the holidays may not deliver record-setting year-on-year growth.

The great unknown, of course, is how the macro-economic climate will affect consumer behavior – especially at a time when the wireless industry has assembled the best selection of devices and services ever offered, with many top-end devices subsidized to tempting price points.

“This year in particular, prices are down and capabilities are way up,” said analyst Avi Greengart at Current Analysis. “There’s no question we’re seeing the best devices ever at the lowest prices. But the impact of the macro-economic environment on holiday sales will make this quarter more dicey than usual.”

Big quarter needed

Having spent phenomenal sums of money to bring their top-end smartphones within consumers’ reach in search of high-revenue data customers, what more can carriers do? (For instance, some estimates of AT&T Mobility’s outlays in the third quarter for its portion of 3G iPhone subsidies reached $900 million.)

“Black Friday is big for carriers,” said Ken Hyers, analyst at Technology Business Research, Inc. “If they’re not reaching their goals by then, they may take another whack at prices. They’ve spent subsidy money all year to sell devices that drive data ARPU and they cannot afford a fourth quarter that doesn’t work out.”

(Carriers routinely decline comment on portfolio pricing and subsidies.)

But don’t expect further price cuts in those halo devices, analysts said. Any mid-quarter price drops are more likely to come in mid- and high-end feature phones that may have launched earlier in the year, such as Samsung Electronic Co. Ltd.’s Instinct at Sprint Nextel Corp., according to Ross Rubin, analyst at NPD Group.

“In the huge sweet spot between the leading handsets and basic voice phones, there’s a wide range of feature phones that carriers can use to entice consumers,” Rubin said.

“Handset prices aren’t necessarily holding back consumers,” Rubin added. “It’s more the perceived lack of benefit to a data plan. In this economy, consumers may hold off upgrading their handsets, especially if they don’t perceive the benefits of a data plan.”

Rubin said that, in addition to possible price cuts on devices, the carriers may well roll-out specials on data plans, as well as promotions on family plans that might help retain subscribers dazzled by the market’s myriad offerings.

Investor concerns

Holiday sales at the carriers – and the knowledge that heavy bets have been placed on subsidizing smartphones in an uncertain economy – are already weighing on investors’ minds, said Matt Thornton, financial analyst for Avian Securities L.L.C.

News of AT&T Mobility’s massive subsidies for the 3G iPhone, for instance, appeared to cause a dip in the carrier’s stock price last week. And handset vendors are hardly immune, according to Thornton. Vendors who’ve sought promotional assistance and shelf space at the carriers have had to discount their products and that puts pressure on average selling prices, margins and earnings, the analyst said.

But it’s damned if you do, damned if you don’t, Thornton added. Vendors who don’t have a significant presence in the smartphone space here in the United States may have to reduce their feature phone prices to the carriers as well. That includes Motorola Inc., LG Electronics Co. and Sony Ericsson Mobile Communications, according to Thornton.

Battle within

Consumers may well be torn between prudence and aspiration, Greengart said.

“There are two conflicting forces at work,” Greengart said. “If you own a good phone, you don’t really need a new one. On the other hand, people now want to do more with their devices. Smartphones are morphing into mobile computing platforms. If consumers are going to spend money, (smartphones) could be the place.”

Within the smartphone category, however, “only the most differentiated devices will succeed, and intense price competition will make the rest unprofitable,” Greengart wrote in a report last week.

“We’re in a unique situation, really, uncharted territory,” Hyers said. “The approaching economy could be worse than the late 1990s, even the early 1980s. That may accelerate the trend of people dropping their landlines. It may favor all-you-can-eat data plans. I’ll be watching the data application companies’ earnings. They’re a bellwether.”


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