Monday October 18, 2010 – Myra Moore
The latest incarnation of the smart phone has set off a kind of gadget lust that is landing these palm-top computers into millions of hands. DTC estimates that more than 300 million will ship worldwide in 2010 representing a 60% growth rate over 2009 – all during the worst economic downturn in recent history.
Cash may be tight but many consumers are willing to pay more in monthly service charges (than for a feature phone) and to be locked into a service contract in exchange for the $500-$750 they’d otherwise shell out to buy the sans provider-contract devices. Nothing new? Technically, no. The service/device subsidy is a well-entrenched business model. But the smart phone fever launched by Apple reveals some subtle but important changes in the seemingly unlikely relationship among consumers, their phones, factory workers, intellectual property owners, and companies selling devices and services.
To date, service providers have mostly sustained the smart phone service charge premium. But some percolating trends suggest that service providers may not want to take for granted that smart phone costs will stabilize with increased competition for the iPhone. Nor should they assume that consumers’ relationships to their smart phones mirror that of their old-school feature phones.
Then there is the potential expectation trap. The escalation of technical sophistication, combined with high-level design and marketing, is one of the defining characteristics that make these devices so appealing. Higher-quality camera functions, HD video recording, and multiple cameras are now populating the higher-end of smart phones (e.g., iPhone4). They aren’t just highly-designed jewel boxes, but they are jewel boxes filled with the jewels that enable communication, entertainment, productivity and are increasingly regarded as an essential life element by a growing number of consumers.
Improvements to these devices and services will only drive up prices despite some cost savings realized from technical evolution and economies of scale. The subsidy model will continue to work only as long as consumers will either sign up for higher monthly fees and/or longer contract terms.
The high-end extras add cost, but according to tear-down reports and analysis from industry insiders, the cost of manufacture and assembly is one of the smallest expenses of smart phones. That, too, is changing. As the Chinese economy fueled by its status as the world’s manufacturing plant has soared, heightened workers’ expectations are resulting in successful demands for higher wages and better working conditions especially in the special economic zones of southern China, Add to that continued increases (albeit gradual) in Chinese currency value and smart phone makers and their service partners may be facing an uncomfortable squeeze on their margins.
And anyone who doesn’t get the high competitive stakes among smart phone suppliers need only read the business press to see how the intellectual property slugfest among smart phone could inject more near-term costs into the exploding market. (see article here)
Does all this really portend a smart phone bubble? Perhaps this is an overly dramatic characterization of a booming market segment that is delivering profits (after all, Apple’s stock price hit $300 last week). Nevertheless, it might be advisable to occasionally look backward at the dot com era and the housing market debacle – both largely declared sure bets in their day. Just in case.
