The fourth-quarter slugfest between Research In Motion Ltd.’s BlackBerry Storm, HTC Corp’s G1 and Apple Inc.’s iPhone 3G – all heavily subsidized and marketed exclusives – reflected several major currents running through the consumer-based wireless industry.
Carriers need to drive data usage to pay for their 3G network investments. They must emphasize differentiated services and, to a lesser degree, cool devices. They must retain subscribers, if not gain new ones. And they must figure out which platforms will be winners as software-and-services begin to become profit centers as well as the main draw for consumers and, not incidentally, application developers.
“These ‘hero’ devices herald the ‘Age of Platforms,” said Michael Gartenberg, an independent technology analyst. “For instance, AT&T Mobility has discovered that iPhone users are 60% more profitable than the average subscriber. When iPhone launched, people asked if AT&T was crazy. Well, 60% greater ARPU is a pretty good deal.”
“The average post-paid ARPU for iPhone users at AT&T is in the mid-$90s,” said analyst Avi Greengart at Current Analysis. “The average, post-paid ARPU for the rest of AT&T’s subscribers is $52. They’re making their (subsidy) money back on data usage.”
In Verizon Wireless’ case, Greengart said, 75% of all Storm buyers were new to the BlackBerry brand and, thus, likely to be new data-plan users and high ARPU subscribers.
“It’s not rocket science,” added analyst Matt Thornton at Avian Securities L.L.C. “If you can bring on attractive data devices, subsidize them to an attractive price point, train your sales staff to push them and you can double ARPU, then you ‘eat it’ on the front end and make your money back on the back end.”
Case in point, Thornton said, is RIM’s ecosystem, which sends data traffic through a RIM network operation center, where the data is compressed, making it much more efficient for carriers to convey it on their networks – like, 20 to 30 times more efficient. “That’s a big reason why BlackBerrys are at so many carriers in the U.S. and overseas,” Thornton said.
One at a time, please
While a carrier tends to spread subsidies throughout its portfolio, the massive marketing push that goes with promoting a “hero” device – targeted at identifying the carrier with a cool, must-have device – means that, in practical terms, there can only be one hero at a time, according to Greengart.
“In marketing, you need focus,” Greengart said. “The definition of a ‘halo’ product is that there’s one, and it’s sexy. And the carriers have found that a subsidized smartphone is the way to do this.”
Why do some carriers announce their sales numbers and others decline?
“Who knows?” said Greengart, who added that if a carrier is shelling out massive amounts of money on subsidizing a handset and it has a “material impact” on earnings, the carrier (see AT&T Mobility’s example) may be obligated to tell investors. And if the sales numbers are good, a carrier may want to reassure its investors.
In Sprint Nextel Corp.’s case, its campaign for Samsung Electronic Co. Ltd.’s Instinct launched prior to the iPhone 3G’s June launch and apparently resulted in solid sales, though that campaign appeared to have been eclipsed by the holiday campaigns of its rivals.
“The Palm Pre will do better,” Greengart said. “I suspect it will launch in early May, which is a window before the media goes crazy prior to Apple’s typical June launch window for new products. The Pre has to sell in the millions (to benefit both Palm and Sprint Nextel).”
Platform battle looms
“The big question,” Thornton added, “over the next two to five years, is which platform will consumers choose? And carriers are asking themselves, ‘Which platforms should we support?’ At a certain point, it becomes a platform choice, and less driven by hardware.”
Thus the battle royale among the fourth quarter’s hero phones merely presages the bigger fight to come.
“In the near future,” Gartenberg said, “no one is going to dominate the landscape. “That’s why the current battle is so interesting. Apple, RIM, Nokia, Google, Microsoft, Palm – and add variations of Java/Linux – are all battling for the developer community. That’s why this is a critical 24 to 36 months – we’ll see where this goes. Six or seven platforms is probably too many. One platform won’t win all, but the vast majority of developers can only support two or three platforms. So, losers are inevitable.”
It’s the stupid economy
And what effect, if any, will a stagnant economy have on the current business model of touting iconic, data-centric devices that represent distinct platform choices?
“At the margins, the economy slows everything down, including the shift to smartphones,” Thornton said.
With subsidies placing the most desirable handsets into a narrow range of comparable prices, consumers will look more carefully – and perhaps commit more slowly – to the accompanying data service packages. In that sense, the economy may slow smartphone growth – widely forecasted to be well above general handset sales, but considerably slower than the growth generated just last year.
