mocoNews - iPhone 3G Price Cut To $99 Will Kneecap The Industry

Dianne See Morrison
mocoNews.net
Tuesday, June 16, 2009; 5:00 PM

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."


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