We've all been ooohing and ahhhhing over the new iPhone 3G S and missing the real news: Apple's decision to slash the price for the older iPhone 3G in half to $99, says Roger Entner, SVP, Head of Research and Insights, for Nielsen's Telecom Practice.
In the storm and fury over whether or not current AT&T subscribers will get a price break if they want to upgrade to the new iPhone 3G S model, it's been easy to overlook the underlying change in the cellular industry that Apple, single-handedly, is forcing.
CIO's Al Saco was also one of those who took note of the Apple price cut. "Suddenly, Apple also has an entry-level player...and a damn fine one, at that," he writes. "Frankly, the iPhone 3G is now one, if not the, best "beginner" smartphones available, in this humble blogsmith's opinion. I'm a BlackBerry lover through and through, but faced with a choice between the iPhone 3G, a Pearl 81xx or a Pearl Flip 82xx, I'd probably pick the iPhone..."
"This is a drastic strategy shift on Apple's part, but one that the company needed to make to truly dominate in the U.S. smartphone space," Saco writes."
The price cut for iPhone 3G will do much more than drive sales for Apple and new subscribers for iPhone's exclusive, U.S. carrier, AT&T. According to Nielsen's Entner, in a blogpost this week, the "new $99 price point for the iPhone 3G completely changes the value proposition of every handset at every carrier in the US."
Not only the just-announced Palm Pre but the dozen or more Google Android-based handsets due out in the latter half of this year, will have prices that "either make them look non-competitive or [look] extremely margin-challenged. Actually, any device over $49 looks outright overpriced..." Entner says that the relative value proposition and price matrix of every carrier's handset portfolio now has to be reworked in light of the $99 iPhone.
"This has massive repercussions for the entire handset business model," he writes. "Handset subsidies have to go up while the price to consumers has to go down to maintain a relative value proposition."
In other words, the new low-priced iPhone changes how subscibers see the value of a smartphone, and what they're willing to pay to get it. In order to keep end-prices low to satisfy those new expectations, carriers will have to increase their phone subsidies, squeezing their profit margins still more. Some of that cost will be shifted to equally reluctant handset manufacturers.
Another possiblity is to shift costs to the monthly service fees, but Entner says it's unclear how much more, if anything, users will be willing to pay.
In fact, one option for AT&T is to take the opposite tack in a bid to increase market share and fund an aggressive network bandwidth expansion: slash its monthly service plans to under $70 a month.
"The competitive reaction [that] such a move would demand would be as value destructive as Verizon Wireless’ introduction of the $99 unlimited plan, which was simply matched by the competition without a meaningful realignment of market share," Entner predicts.
The implication, he says, is that voice is now a commodity service, and carriers must rely on data service and devices to differentiate themselves. For AT&T, that's a good place to be in for now, since the iPhone has had an enormous impact on attracting new subscribers, who use a lot of data.
But when AT&T's exclusive U.S. contract for the iPhone inevitably ends, Entner warns, the carrier "has to figure out what success will look like after the Apple exclusivity runs out and it has to live in the world it delivered."
Cox is a senior editor at Network World.
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