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Wireless contracts: an endangered species soon

05 Jun

motorola-x-phoneThe funny thing about Canada finally getting in line with the rest of the developed world in making two-year cellphone contracts the norm rather than three years is that, as per usual, we’re probably still going to end up behind the times. Don’t look now, but one-year contracts are about to become the standard everywhere else.

Speaking at the D11 conference last week, Motorola chief executive Dennis Woodside effectively declared as much by unveiling the Google-owned company’s next smartphone, the Moto X: a high-end smartphone that will be priced significantly less than comparable competitors. Woodside pulled no punches in taking shots at the likes of Samsung and Apple, who make huge profits on devices that are priced at $700 or more.

His money quote: “Those products earn 50-per-cent margins. We don’t necessarily have those constraints. Those [margins] will not persist.”

He went on to say, “One of the areas that we think is really open for Motorola is building high-quality, low-cost devices. The price of a feature phone right now is about $30 on a global basis, the [wholesale] price of a smartphone is $650? That’s not gonna persist.”

Google has been trying to disrupt the cellphone market for a while now and has been learning how to better do so along the way. The $300 Nexus 4 was only a mild success last year, but it was also significantly under-powered – it lacked LTE, for example – compared to competitors. The Moto X, however, is a so-called “Hero” phone, or one decked out with all the latest specifications. Woodside said it will also be broadly available, as opposed to sold online only.

Google’s motivation is obvious: why go for the quick buck on the hardware side when it can make bigger bucks over a longer-term on the services side? The more people use their phones – and specifically Google services – the more money the company stands to make. With that kind of logic, the company isn’t above selling devices with microscopic margins – or even at a loss – if it results in the greater objective being met.

That’s a hugely disruptive position for both competing manufacturers and wireless carriers. Motorola’s high-end, low-cost phones will likely prove to be popular with consumers, meaning that Apple and Samsung are going to have to start dropping their margins to compete.

Carriers aren’t going to like that, because lower-priced phones will also lower the need for customers to sign on to long-term contracts. After all, if you can get a high-powered, unlocked device for, say, $250, why would you lock yourself in?

It wouldn’t be surprising to see carriers refuse to sell the Moto X for that reason. The success of Google’s plan will ultimately depend on how it can make such a device widely available without carrier support – selling it at Walmart, coupled with a huge marketing campaign, might do it. Pricing the phone at $200 outright would be the killer.

Smartphones have so far resisted technology trends, where the continually declining cost of components has led to steadily decreasing prices on everything from computers to televisions to tablets, mainly because carriers have acted as the middle-men in the transaction.

But, as differently-motivated companies such as Google and Motorola find ways around that set-up, commoditization will inevitably set in and phone prices will fall. As a recent Globe and Mail story shows, this is already beginning to happen worldwide:

According to data from global research firm International Data Corp. (IDC) released to The Globe and Mail, smartphones costing less than $250 made up 37 per cent of all units shipped in 2012, up from 27 per cent in 2011. An even cheaper segment – smartphones priced between $75 and $100 – grew by 750 per cent. Meanwhile, the highest-priced phones showed slowing or negative worldwide growth, the research shows. “The world is awash in low-cost smartphones,” says Kevin Restivo, an IDC mobile device analyst.

This is all music to consumers’ ears since it means the whole wireless market in the developed world is about to be redefined. In the near term, phones are going to get cheaper, which means consumers won’t need as much of a subsidy from their carrier in order to afford the latest and greatest. While nobody wants to shell out $700 for a phone up front, there will be lots of people who are willing to pay $300 if it means they won’t be shackled to a carrier. There will be even more who will happy hand over $200, with the remaining cost perhaps being subsidized by a one-year contract.

In the longer term – and this could actually happen quite quickly, say in the next two or three years – smartphones could get down to such an affordable level that contracts and subsidies won’t be needed at all, at which point competition between wireless carriers will turn fierce and monthly service prices will plummet.

But here in Canada, if history is any indicator, we’ll probably still be rejoicing our newly-won two-year contracts.

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12 Comments

Posted by on June 5, 2013 in android, apple, Google, mobile, motorola

 

12 responses to “Wireless contracts: an endangered species soon

  1. Marc Venot

    June 5, 2013 at 12:27 am

    If the price is no longer a hurdle it will become essential to think how to wear it in the most convenient way, including as a purse. It will be fun when holographic image become the norm and we see people punching the air.

     
  2. bradfonseca

    June 5, 2013 at 8:52 am

    Reblogged this on The Emporium of Lost Thoughts and commented:
    Canada continues to lag behind in wireless contracts even with the recent CRTC ruling.

     
  3. globeman

    June 5, 2013 at 10:23 pm

    Why does Mr. Nowak spend so much time and effort hating telecom companies? I don’t know how one can live a happy life doing that constantly. Does he not have a life? Mr. Nowak, if you hate the telecom companies so much, why not get a job with them? This might cheer him up: http://www.youtube.com/watch?v=UxjPjw04DF4

     
    • Peter Nowak

      June 5, 2013 at 10:52 pm

      Actually, it’s my job to analyze and write about telecom companies, the technology the use and disseminate and how all of that affects the world. I certainly don’t hate any companies and don’t know why you’d think that. Is there something above that gives that impression?

      I’m wondering whether you flood all comment sections with irrelevant YouTube videos, or if it’s just mine?

       
      • globeman

        June 5, 2013 at 11:08 pm

        Your ideas are so out of touch I don’t even know why media outlets give you air time. You clearly have no knowledge of this industry. Please, just stop embarrassing yourself along with those OpenMedia goons, and stop commenting on this industry.

         
  4. Peter Nowak

    June 5, 2013 at 11:16 pm

    Sorry globeman, not going to do that. If my ideas bother you so much, you’re very free to ignore them. I’d ask that you not waste anyone’s time with pointless comments and videos.

     
  5. globeman

    June 5, 2013 at 11:20 pm

    OK, I’d just like an independent “expert” that has some kind of economic background and experience in making telecom business cases proclaiming to be a “telecom analyst” on TV, rather than some lay journalist who’s written a book about sex, porn, and technology. This is just my perspective from actually having experience in the industry.

     
    • Peter Nowak

      June 5, 2013 at 11:40 pm

      I don’t proclaim to be anything other than a journalist. I have covered this industry for eight years, a job that involves talking to and trying to understand all sides of an issue, not just the economic or industry side, which is probably why I’m asked for my thoughts. As I said before, if you don’t like those thoughts, don’t listen, read or tune in. I’m happy to discuss and debate, but I’m not very keen to respond to anonymous impugnities on the job I do. I don’t do that to you, so I’d ask you to extend the same courtesy and civility.

       
      • Michael Elling (@Infostack)

        June 6, 2013 at 6:28 am

        The point of the video is to show us how little the bell system actually developed over the past 30 years. In fact, I can’t think of one solution/technology that the bell system suggested/created that has scaled and is still in use today that was introduced since we broke up AT&T and unleashed 3 highly generative and digital waves in voice, data and wireless. Let’s see, cheap/free voice, ubiquitous cheap/free data, and cheap/free wireless with 802.11 and 1G digital (introduced by our friends at Microcell. Oh Canada!). All in less than 10 years from that ad. And NYT/Verizon hardly carries any of it today on its wired facilities 23 years later. That’s progress!

         
      • A(nother) Yes Man (@elquintron)

        June 6, 2013 at 7:18 pm

        Well Peter, it looks like you’ve hit the big time, cause you’ve got Telco-troll bottomfeeders trying to discredit you.

        I love your work, and appreciate the post. I agree that Google’s move is a step in the right direction by trying to get smart phone pricing in line with other technological devices and computers. Unfortunately, I think a lot of phone companies are going to try and pull an HBO, by marrying their product to the carriers, and keep prices artificially high that way.

        I hope Google’s step in the right direction will gain some traction, but only time will tell

         
      • russellmcormond

        June 7, 2013 at 2:46 pm

        Glad you don’t concern yourself with the views of the anonymous cowards. When one shills for the incumbents, I don’t take it very seriously. What I worry more about is other journalists who take the press releases from the incumbents at face value rather than applying critical thinking skills like you do. Far too many believe the nonsense that BellUsOgers feed them.

        As to these “independent experts”, it is hard to hear them past the noise from BellUsOgers who claim to have experts who are only expert in manipulating government policy to gain more handouts, not experts in telecommunications technology.

         
    • redneckonthetrain

      June 6, 2013 at 10:12 pm

      globe:

      Nice work tearing down Nowak, or at least assassinating his character while completely avoiding commentary towards any of the points above or in other articles.

      You might think the rest of us are idiots but the rest of us think you are an idiot. Maybe spend a little more time talking about the subject instead of blithering on about how Nowaks socks smell. No one cares but you, troll.

      I’d have banned your IP adress long ago for wasting the time of everyone who is actually interested in having a conversation. I guess Nowak is much more tolerant then I.

       
 
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