How Will "No Contract" Smartphone Sales Affect Adoption?

What happens to smartphone sales, data plan sales, consumer behavior and mobile service provider marketing if phones cannot be provided at subsidized prices? If sales of smartphones fall, then use of mobile broadband services likely will grow more slowly. So smartphone prices do matter.

Up to this point, mobile phone subsidies have been seen as a “necessary evil” for the development of mobile phone services and have helped kick start the mass market for mobile phone services in many markets around the world. And it would be hard to underestimate the role subsidized handet pricing has had.

Handset subsidies are viewed as a loss leader strategy, a means for bringing new subscribers onboard, or encouraging existing subscribers to churn away from their existing network and onto a competitor’s.

But investors do not like the practice, as it puts pressure on service provider cash flow. Regulators do not seem to like the practice because subsidies mean contracts, and contracts lessen consumer ability to change carriers.

Global smartphone volumes will represent 14 per cent of total mobile devices sales in 2009, growing by 23.6 per cent from 2008 and to 38 per cent by 2013, say analysts at Gartner.

Smartphone prices are falling as shipment volumes increase, and a new study from ABI Research finds that while in 2007 only 18 percent of smartphones on offer cost under $200 retail, that percentage has already grown to 27 percent in 2009. By 2014, say the firm’s forecasts, 45 percent of the smartphones shipped that year will be priced below $200.

“Manufacturers see consumers increasingly demanding smartphones, because of their better understanding of the value that a smartphone delivers,” says mobile devices practice director Kevin Burden.

The result: more and more smartphones and conventional phones are priced in similar ranges. According to ABI Research, by far the greatest increase in smartphone shipment volumes over the next five years will be found in the $100-200 price range.

But what happens if new government regulations bar the practice of phone subsidies, and consumers must pay full retail price for new high-end models? Less buying.

On the other hand, there will be more buying of cheaper models. That doesn't necessarily mean smartphone sales overall will plunge, but it will be far more difficult to sell massive quantities of new high-end devices, as few consumers have shown any willingness to spend $600 for unlocked devices.

Of course, there are other possibilities. Perhaps some providers will be able to create new payment models, such as offering installment plans for purchase of new high-end devices. A few might consider other subsidy programs that serve up ads and default applications in exchange for lower-cost devices.

Advantage also will be gained by manufacturers that can wring out costs, offering high-performance devices that just cost less to begin with.

What seems clear, though, is that mandated sales of full price devices, sold without contracts, will have massive impact on the take rate for high-end devices.