Insights

The Impact Of The iPhone 3G Price Cut
Article

The Impact Of The iPhone 3G Price Cut

Value Remapping of the Carriers’ Handset Portfolio

Roger Entner, SVP, Head of Research and Insights, Telecom Practice

As widely expected, Apple announced the new iPhone 3GS at its Worldwide Developers Conference in San Francisco. This latest iPhone offers incremental improvements over the iPhone 3G at the existing $199/$299 price points. The bigger news that few, if any, expected was that the older iPhone 3G was going to continue to be sold, but at the new $99 price point.  It is self-evident that this price cut will drive sales. According to Nielsen’s Mobile Insights survey, which asks 25,000 Americans every month about their wireless attitudes and behaviors, the second most important factor-noted by 20% of respondents-as to why people did not pick the iPhone was its price.

What has been largely overlooked is the impact of the iPhone 3G price cut on the industry as a whole.  It is hard to overestimate the impact that a $99 iPhone has on the wireless carriers and handset manufacturers in the US. The new $99 price point for the iPhone 3G completely changes the value proposition of every handset at every carrier in the US. Some observers have commented that the $99 price point “kneecaps the Palm Pre,” but the kneecapping does not stop there. The dozen or more Google Android handsets that are being launched in the second half of the year will have prices that either make them look non-competitive or extremely margin-challenged. Actually, any device over $49 looks outright overpriced, and the feature phones in general have become a commodity. As a result, the relative value proposition and price matrix of every carrier’s handset portfolio has to be remapped. This has massive repercussions for the entire handset business model. Handset subsidies have to go up while the price to consumers has to go down to maintain a relative value proposition. Carriers will share the pain of lower handset prices with device manufactures whose margins will be further compressed, adding to the pressure they feel with the slowdown in the global economy. Carriers also have to think about if they can or want to shift the up-front cost of owning a device to the monthly recurring charge. It remains to be seen how much price elasticity exists in an economy that is still struggling and will shed jobs for a long time. AT&T could scorch the earth for its competitors by introducing a lower cost data plan that brings the minimum monthly cost of carrying an iPhone below $70, addressing the number one reason people passed on the iPhone. The competitive reaction to 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 — it would be another example of how industry players have acted diametric to Pareto-optimality.

The implied point of view and resulting strategy is that voice has been commoditized and has become table stakes. Defendable differentiation will come from devices and data. Now that might be true in the longer run, and especially as long as one has the iPhone exclusively. While the exclusive Apple relationship is a pillar of strength for AT&T and a large factor in its continued and future success, AT&T has to be painfully aware that its fortunes are tied to that exclusivity. More than 80% of AT&T’s net adds in Q1 2009 came from the iPhone. While the other carriers have to plan on how to compete in the next few quarters, AT&T 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.