Study: High Phone Prices Holding Back Data Adoption

Boston— The average wholesale price of wireless phones to U.S. carriers will continue to slide in 2003, but not quickly enough to entice hordes of consumers to buy feature-laden data-capable phones that could generate additional airtime revenue for carriers, a Strategy Analytics study concludes.

To entice a hefty number of consumers to use advanced data services, carriers would have to increase their subsidies on high-tier phones in 2003 to bring their prices down to an average $150 from a current $175-$299, said analyst Chris Ambrosio. To date, however, carriers have been putting their highest subsidies on low-end phones to obtain new subscribers, he said.

"The pressure is on carriers to increase subsidies to promote step-up [service plan] sales," he said. "People don't want to pay more than $150 for a phone."

To entice consumers to buy revenue-boosting feature-rich phones, Ambrosio said, "A high-value subscriber should get the same subsidy as a new user, but as a whole, carriers aren't doing that."

High-tier phones would include such features as color screens, polyphonic ring tones, Java or BREW capabilities, built-in cameras, and multimedia messaging service (MMS).

"In the mid- to long-term," Ambrosio noted, "I'm bullish on what can happen [with data services], but it won't happen in 2003."

In 2003, factory-level unit sales will rise 9 percent to 85.8 million while dollar volume will rise only 4 percent to $10.4 billion. The average wholesale price will drop 5 percent to an average $122. That follows a 9 percent increase in units in 2002 to 79 million, a 1.1 percent in dollars to $10.1 billion, and a 7.3 percent decline in average wholesale prices to $128.

Although the number of replacement handsets is rising, he noted, the percentage replacement rate has held steady at 49-50 percent of the subscriber base in 2000-2002 and will slip slightly in 2003 because of war clouds and a slow-growth economy, he projected. "With 50 percent penetration, it's silly for carriers to expect replacement rates of 60 percent," he noted.

Ambrosio also noted that vendors such as Nokia, Motorola and Audiovox are increasing their focus on feature-rich phones in a bid to boost wholesale prices, even though "carriers would love to see wholesales down so they can subsidize phones less."

Although more suppliers are trying to compete in the feature-rich segment, he added, "it will be tough for newcomers to break into [this segment]." Carriers trying to drive data services will choose brands that can deliver marketing support and brand power," he explained. The marketing support, he noted, effectively reduces carrier subsidies. The three vendors offering both attributes are Nokia, Motorola and Samsung.