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Will T-Mobile's hundred dollar smartphone with ten dollar data plan win subs?

Chief Executive Philipp Humm said in an interview that many of his smartphones will eventually be made up of Google-powered phones costing less than $100, half as much as the smartphones typically available at U.S. carriers. In October, to lower the cost of monthly bills, Mr. Humm introduced a limited data plan that costs $10.

via T-Mobile Smartphones to Head Down Market – WSJ.com.

T-Mobile seems to be attempting to differentiate on price. In a regular market reaching saturation that might be a viable strategy. However the market is neither regular not saturated. T-Mobile’s chances of gaining large share are limited.

Churn, or the chance that a user will switch networks is still very low. If anything, AT&T and Verizon are more sticky and lose fewer customers than T-Mobile and Sprint.

Mobile computing saturation (25% to 30% penetration) is also not nearly at a point where competition on price leads adoption.

Lastly, the $100 price point is being put against the standard $200 price point which itself is an illusion for the user. The drop in smartphone entry price is not as powerful going from $200 to $100 as it is from $300 to $200. Psychologically, $200 is an inflection point. Apple’s $100 3GS pricing (now $49) is defensive and probably effective.

In short, the market for telecom services is not very “liquid” and users are quite trapped in their carrier contracts, pricing is not yet a basis for competition and pricing illusions persist.

In conclusion:

Mr. Humm, in an interview at the Consumer Electronics Show in Las Vegas, acknowledged that the likelihood Verizon Wireless getting the iPhone as well could affect his subscriber numbers.

  • jecrawford

    Horace

    I read, in the link below, Dr. Hermann Hauser's view that the Wintel hegemony is dead and the mobile era is upon us. What do you think?
    http://blogs.wsj.com/tech-europe/2010/11/19/intel

    John

    • asymco

      He makes a very powerful claim: that Intel's business model is obsolete. By licensing rather than building chips ARM lets device makers create conformable SOC which are better suited to mobile computing.

      This is a disruptive idea and one which is probably true.

  • http://twitter.com/aegisdesign @aegisdesign

    Hopefully this signals the end of the strange US only insistence on expensive dataplans recouped through heavily subsidised expensive smartphones.

    • asymco

      I would not count on it. If anything, the opposite will be the trend this year. T-Mobile will probably accelerate losing subs to Verizon and AT&T. Even the T-Mobile CEO seems to suggest it.

  • Priit

    Well, i think $100 smartphone will be just too shitty and because of this will not be that popular. Mainly because for the most obvious target group (poor) the trend is, i believe, that smartphone will be their only, or main computer and $100 smartphone is just too bad for that.

    • http://twitter.com/aegisdesign @aegisdesign

      $100 smartphones sell by the bucketload in Europe for people addicted to Facebook. Nokia's cheapest smartphone, the 5228 sells for about $50 now. No 3G, GPS or Wifi but that really doesn't bother people that just want text, facebook and maybe a few calls for $10 a month PAYG.

      Cheap dataplans have opened up the featurephone end of the market to smartphones, democratising usage. It needs to happen in the US too otherwise you'll have a gap between voice users at the low end and superphone users at the top end.

  • Bob Shaw

    It appears that the innovation in the smart phones have overshot the needs of a segment of the customers. There is a segment who have very limited and occasional computing need using their smart phone and who are price sensitive. T-Mobile is targeting this segment with a low cost plan using a low cost handset and limited data plan.

    • dchu220

      T-Mobile definitely thinks so. Lets see the sales numbers before we draw a conclusion.

      It could also be seen as a sign of desperation by T-Mobile. T-Mobile may just be reacting to the market saying that their network and phones are not good enough.

      • asymco

        One other thing to keep in mind is that T-Mobile USA's parent distributes the iPhone in several other countries. They have access to all the sales data. They know much more about their customers than we are able to even ask. How they act in the US must be a factor of that knowledge.

      • WaltFrench

        Yes, but it's strange: they seemingly sit by passively while VZ & T are consolidating their positions. There must be some Greater Plan such as collecting service fees without investing in their network or offerings, but no amount of head-scratching on my part has come up with a plausible US business plan that they're working from.

    • asymco

      Apple has always positioned the iPhone n-1 version at a lower price point (now $49) but I don't see a lot of evidence that the older, cheaper (but good enough) version sells very well. That may have something to do also with the data plan and that's where T-Mobile might get an edge, but it's still more complicated than that.

      The number of adopters for high cost data plans (around $70/mo) is very large and largely independent of platform or device. The value of that plan seems to be acceptable given the price for large segments of the population.

      What I also point out is that many households tolerate paying over $100/mo for television access. That's a staggeringly high figure and one which has been increasing not decreasing.

      The typical cable bill shows how consumers can be educated to pay for option value. TV used to be free but it had commercials. Now TV is very expensive and you get even more commercials. TV consumption is still growing.

      • http://twitter.com/aegisdesign @aegisdesign

        In the US at least, the iPhone n-1 is on the same plans as the current iPhone so it's still expensive in the long run. In Europe, it's usually on a cheaper plan than the current iPhone although still in the upper bands. Nobody is doing $10-20 contracts on the iPhone n-1 unlike all the $100 Nokias, HTCs, ZTEs and Huaweis. It's still an expensive handset with a lot of subsidy to claw back.

      • WaltFrench

        The “option value” logic would make more sense if the market for individual premium shows actually existed. Bundling, even the notion of a "channel" defeats the consumer intention of choosing to easily & inexpensively watching a "show" or "movie" or "game," which are arguably the atomic units here. Maybe, an "evening" or "today's playoffs."

        But a 25-channel package? No consumer would ever design such a mishmash item. The only excuse for these bill fatteners is the execrable billing/customer service capabilities of the cable cos that make the thought of choosing items individually at 50¢ to $5 each as a nightmare.

      • WaltFrench

        What do we know about the iPad by-the-month data plan takeup? Is it popular? Do customers basically turn it on and never shut it down?

        If I were T-Mo, I'd certainly look into a one-year package of voice-data (paid monthly) and put it up against the competition. Everybody knows, but can ignore, the fact that the $100 is chump change in the game, but T-Mo seems to have nothing to lose.

  • O.C.

    Are smartphones that expensive in the US that you have to pay $100 or more for a phone coupled with a 2 year contract and dataplan?

    Here in the Netherlands I bought a Nokia C7 – more or less the same features as the N8 – with a T-Mobile unlimited dataplan on a 1 year contract and I paid €30 for the phone. The unlimited dataplan itself cost me €4,95 a month.

    • asymco

      What consumers pay varies widely. What device vendors get paid is easy to determine. Apple, HTC, and RIM average over $450/phone. You can see these latest average selling prices here: http://www.asymco.com/2010/11/01/whats-the-opposi

      Those averages are world-wide.

  • http://twitter.com/judsontwit @judsontwit

    On a related note, I could be overestimating the benefit of competition here, but I hope that T-Mobile and Sprint don't take huge losses in the period where Verizon and AT&T exercise the iPhone against them. (This is assuming that Apple chooses to leave the phone in the hands of these companies for an exclusive period of time.)

    I know nothing about T-Mobile or Sprint, but I really hope the iPhone isn't powerful enough to drastically consolidate the current cellular landscape.

    I also know that T-Mobile and Sprint aren't saints either – they're competing national carriers, but still.

  • capablanca

    The present value of a two year $70 plan is about $1,600. The real difference, for example, between a $100 iPhone and a $200 iPhone is the difference between $1,700 and $1,800.

    While in the short run, many customers may choose to ignore this part of the cost of the smart phone experience, it needs to be a part of our analysis. I recognize this is obvious to virtually everyone who reads this blog, but yet it sometimes gets lost in the text of comments.

    Thus in the T-Mobile case, it is the $10 data plan that is deserving of our attention. Their thesis may be an attempt to segment the market rather than to gain market share of the existing smart phone market. Rim has already demonstrated that in markets other than U.S./Western Europe there is demand for a low cost phone with inexpensive text messaging.

  • Ziad Fazel

    The $100 (preferably $50) smartphone with $10/month data may be the perfect entry point for all those people switching from free cellphones on voice + SMS plans. Low margin, low R&D, high volume.

    T-Mobile might also be hoping that capturing customers in this commodity tier of the smartphone market, at low to break-even profits, will reap benefits as they upgrade to premium phones and plans.

  • yet another steve

    A cheap phone with a camera and facebook meets the real needs/wants of a lot of users. They'll get counted into the Android market share figures… but as an app developer, these users are not a lucrative target.

    Not sure they're that lucrative for TMobile either… but it looks like the cost to Apple of a rich deal with Verizon is not to distribute the iphone on TMobile or Sprint.

    But I want TMobile to do well because I so enjoy watching their new spokesmodel in their tv spots. :)

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  • ayaan

    This is not what I was looking for…