What Impact Will Declining Smart Phone Subsidies Have on Penetration, Innovation?

It is a fundamental economics insight that when suppliers raise the price of any product, demand drops.


So it takes no particular insight to predict that if mobile service providers start reducing the subsidies they now offer to spur smart phone adoption, adoption rates will fall. And there is growing opinion that smart phone subsidies in the U.S. market are about to become less generous. 


Analyst Walter Piecyk of BTIG, in fact, already has cut his earnings projections for Apple, on the assumption that lower subsidies will lead directly to lower sales of Apple iPhones. The same will be true for suppliers of other devices that also are subsidized less.


 The subsidies can't last, he argues, in part because the ever-growing cost of the devices is putting a strain on operating revenue. 

In addition to fewer sales of smart phones, any abandonment of subsidies would slow replacement rates and arguably slow the rate of innovation for any application or feature that requires new handset functionality.


Any such change also would provide benefits for providers of lower-cost smart phones, as well. On the other hand, an end to subsidies would likely also mean an end to multi-year contracts, which would tend to increase customer churn. 


Hand set subsidies are a double-edged sword, in other words. As much as service providers would like not to provide the subsidies, there are negatives to be faced, including higher churn, slower smart phone adoption and a shift of sales toward less-expensive models.