iPhone Price Cut To $99 Will ‘Kneecap’ The Industry

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iPhone Price Cut To $99 Will ‘Kneecap’ The Industry

Apple’s price cut of the iPhone 3G to $99, largely overlooked at the launch of the iPhone 3GS last week, will not just “kneecap” the Palm (NSDQ: PALM) Pre, but will kneecap the entire industry, and most importantly carriers and cellphone makers, according to Roger Entner, Nielsen’s Telecom Practice research head.

In a very persuasive post, Entner writes that the new $99 price point for the iPhone 3G “completely changes the value proposition of every handset at every carrier in the US.” Now that the price of the iPhone 3G has been halved, any device over $49 looks “outright overpriced, spelling immediate trouble for the raft of smartphone devices expected later this year. Their price tags will either look seriously expensive next to the iPhone, or “extremely margin-challenged” if priced competitively. But what does this mean for the industry?

Entner’s main points after the jump:

—Higher subsidies looming: Entner believes that handset susbsidies can only go up, since “the price to consumers has to go down to maintain a relative value proposition.” Carriers, of course, will have to absorb the higher subsidies, whom they will no doubt try to share with cellphone makers, whose margins, already under pressure, will be further compressed.

—Tinkering with monthly plan costs: Carriers could just shift the upfront cost of a phone to the monthly charge by making it more expensive. But Entner says it “remains to be seen” how willing consumers are to paying the higher monthly charges.

—Scorched-earth data pricing: AT&T (NYSE: T) could “scorch the earth” for competitors by cutting its iPhone data plans below $70—another reason people don’t get an iPhone. But this writes Entner would be as “value destructive” as when Verizon (NYSE: VZ) introduced its $99 unlimited plan, and the entire industry followed to match the price bringing everyone back to the status quo, with even more pressure on profits.

—Differentiating with devices and data: So voice is now a commodity and the only path to “defendable” differentiation is through device and data, or so AT&T’s current pact with Apple (NSDQ: AAPL) implies. This only works as long as the carrier has the iPhone exclusively. Once the pact ends, so does the flow of net adds coming for the device—some 80 percent of AT&T’s net adds in Q1 came for the iPhone. Entner writes that while other carriers may be trying to figure out how to compete in the next few quarters that it doesn’t have the iPhone, “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.”

Dianne See Morrison Jun 16, 2009 10:38 AM ET

Posted In: Gadgets, Companies, Apple, AT&T

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Stephen

I agree that a $99 iphone could kneecap the industry but it seems that it is also bringing AT&T service to it's knees.

A Cingular (now AT&T) customer for about a decade now I'd say I probably dropped a call or had poor quality once a month up until about mid-2008. Quality seems to deteriorate constantly to the point that now I can not make back-to-back calls during work hours without at least one of them being dropped or playing the "can you hear me now" game.

Rob M

This is classic Apple strategy - it is deja vu regarding the iPod strategy. Drive the market with the best new product at same price point, whilst also widening the market with a cheaper version of the existing product.

I watch quite often Steve Jobs' Macworld intro of the iPhone from January 2007. This product intro will, I believe, go down as an all time great. He says it all, with the right retoric:

'5 years ahead of any other smartphone'.
'The best software needs the best hardware'.
'Skating to where the puck will be, not where it is now'...

And that is still the case now - Apple is driving this market, Apple has a road map for mobile computing, and the WinMo's and Nokias of this world still do not know what has hit them!

Daniel Cataneo

"This could be very clever on Appleâs part. Rather than inventing a new, lower cost phone they merely drop the price on the old model for which all of their costs have already been amortized and they know this phone is reliable and they know the warranty costs and manufacturing costs to the penny. If they engineered a new, low cost phone theyâd have to pay for the engineering and then thereâd bee some uncertainty about bugs or defects. This is very smart."

Quite true - For $99, the consumer receives an non-compromised, premium iPhone, with a system upgrade which virtually elevates its capabilities to those of the newest GS model. (sans video, select focus, compass, and full system voice control, for now) The newer price point will make this choice a no-brainer for the smart-phone crowd, as well as for those sitting on the fence about upgrading from a generic cell to a smart phone - I know droves of people who are of this demographic - very smart indeed!

John

It is not that everyone wants the iPhone. It is that the iPhone sells well enough that it can influence prices.

If iPhones sold for $500 and someone paid $200 for some other phone that caught their eye odds are they'd feel good about the decision. But compare the exact same deal to a $99 iPhone and now they don't feel so clever.

This doesn't have to affect everyone, just a large segment of the buying public to put pressure on other smart phone suppliers.

This could be very clever on Apple's part. Rather than inventing a new, lower cost phone they merely drop the price on the old model for which all of their costs have already been amortized and they know this phone is reliable and they know the warranty costs and manufacturing costs to the penny. If they engineered a new, low cost phone they'd have to pay for the engineering and then there'd bee some uncertainty about bugs or defects. This is very smart.

Polomoche

Have you seen what else AT&T is selling for $99 on a 2-year contract? A Nokia E71x, a Samsung Jack, and a *refurbed* Blackberry Curve, and Motorola Q, What would you choose if you were willing to spend $99 on a phone?

Kiwiiano

And remember that the $99 iPhone with the new v3.0 OS is NOT the current iPhone. V3 is a huge expansion in performance and goes a loooong way to correcting the things about my iTouch (& the iPhone) that make my teeth itch.

Constable Odo

The iPhone won't kneecap the phone industry, just the smartphone industry. That's good enough because that's where the profit margins are. I would think that the new smartphone user (the average non-techie) would pick any iPhone over any OTHER touch-screen handset for ease of use and availability of tens of thousands of apps.

Agreed that data plans are too expensive for people that barely need a handset. I'm more concerned about AT&T running out of bandwidth than almost anything else. I just know people are going to be snatching up those 8GB iPhones like crazy just to say they got one. They'll know in about six months whether they can actually afford to be iPhone owners.

Boutique Accommodation

I wonder when the exclusivity deal finishes between Apple and AT&T, if Apple will be able to convince other Telecoms to subsidise the iPhone enough so they can keep the $99 pricepoint??

I mean Verizons "all you can eat" plans surely wouldn't be able to cover the cost of the phone and data consumption at their current price-points??

veggiedude

Apple is doing to the SmartPhone market like they did to the MP3 market. Soon 80% of SmartPhones will be an Apple device.

But as KMC said, not everyone wants of needs a pocket computer - some will be content with just a phone.

roz

The real cost is the data plan. $30 / month is still a big barrier for most people.

But if you are willing to pay that and you want a smart phone, if its a your decision, meaning your work does not require a blackberry or for you to use a carrier other than ATT, then yeah, you'd be silly to get anything but the iPhone. It's way better than anything else out there and it's your iPod too….

J

Whether you like ATT or not. Or like the iPhone or not doesn't matter. The iPhone has a strong mind share position in the market. If you're in the market to get a mobile device the iPhone will be on the short list. It may not be what you buy but it will effect the evaluation process. All other things being equal would you choose a $99 or some thing that cost substantially more. Manufacturers will have to take this in to consideration and cut their margin or limit their market.

Blackberry is strong now but how long can they maintain that position? The larger consumer market will allow Apple to continually move the price down and the applications business wants will come from vendors wanting to capitalize on the greater market. Apple is eating the ground under the vendors. Before they know it they'll be niche players wondering where their market went.

Remember Apple came late to the MP3 market. Started out as the high end solution. Reviews complained that Apple was too costly. Just before a viable moderate priced competitor came out Apple releases a low end to under cut the moderate price. Poof goes the market.

Just another device???

@ KMC

re: "...Honestly itâs just another device with rather generic features and consisting of limitations…"

I can agree that the iPhone isn't for everyone but you gotta be on crack to suggest that it is "just another device" Go ahead though, you guys at Verizon keep sticking your heads in the sand and telling yourself that.

Jim G

kmc is right. Not everyone needs an iPhone. Not everyone wants AT&T.

Most people can get by with a Jitterbug if all that is needed is a phone.

Blackberry will still hold Corporate I.T. that invested in BES. And Lotus Notes.

Anything else will be niche.

Bertha Fattz

Hi Steve B., new username? Out trolling?
Have a nice day!

E

kmc:

The market disagrees with you.

kmc

I disagree with Entner's analysis. The iPhone does not suit every wireless consumer's needs, and not every wireless consumer is with AT&T or wants to be with AT&T. Not every wireless consumer likes the iPhone. Honestly it's just another device with rather generic features and consisting of limitations. Many consumers will still find greater value in other devices still. Let's not get this whole Jesus phone thing blown out proportion.