Cell Phone Buyers Expect to Pay $111, iPhone 3GS Has Most Value

Would consumers be willing to pay full price for a handset if it meant an end to contracts or possibly more affordable data plans? Not if you look at the latest study conducted by Interpret, and authored by senior analyst Desiree Davis, which says that the vast majority will fork over between $50 and $150 for their next handset. Smart phone buyers are willing to spend $171 on average, but the bottom line is that carrier subsidies (and all the attendant trappings) aren’t going anywhere.

To put these numbers in perspective, it’s been reported by the Wall Street Journal and others that AT&T has been paying Apple a $400-a-phone subsidy for each device sold since June of last year. In other words, there’s no chance in hell that consumers would be willing to fork over $600 for an iPhone 3GS.

Interestingly, the BlackBerry Storm ($359.99) had the least amount of perceived value among those surveyed (based on what consumers deemed the most appropriate price to pay). And the iPhone 3GS, Palm Pre and T-Mobile G1 rounded out the top three spots as having the most perceived value.

To get more insight into this study and what it means for smart phone buyers and the wireless industry, we spoke with Interpret’s Vice President of Strategy and Analysis, Michael Gartenberg.

How much do consumers care about monthly data fees versus the cost of a device in general, considering that the initial price doesn’t take into consideration the total cost of ownership over two years?

MG: It seems that it’s not that big an issue to consumers. It’s almost as if they expect the 2-year contract and monthly plan as table stakes. It’s fairly difficult to compare plans apples to apples, so consumers usually either pick their carrier or pick their device and then pick the plan that they can afford best to go with that. But it’s a message that some companies like Palm are trying to underscore. If you buy the Pre, over the cost of 2 years you’re going to save quite a bit of money if you go with a different device. That message isn’t resonating to consumers, at least not yet.

Do you think smart phones are going to kill off dumb phones in the not-too-distant future?

MG: We’re going to get to a point in time where every phone on the market is going to be a smart phone of some sort; it will be app capable, capable of more things that are native out of the box. A few years ago, a vast majority of consumers, if I gave them a super high-end smart phone or a free phone, or the cheap phone that the carrier gives you with a cost difference of as little as $45, most consumers would have said ‘I’ll take the free phone.’ Vendors have done a really good job here at evangelizing consumers to recognize that there’s value in these devices.

Having said that, even at $170, there’s no way that the phone like the iPhone, or the Pre, or the G1, or the Touch Pro 2, could be sold unless there’s carrier subsidies involved. So anyone who says that carrier subsidies are going by the wayside any time in the near future is just wrong. We’re at the upper limits of what consumers are willing to pay for these devices.

To that point, what are your thoughts on Sprint pricing the Touch Pro 2 at $349? Is anyone going to pay that?

MG: That’s a niche enthusiast phone; $199 is really the sweet spot. If consumers are willing to spend $170, they’ll probably spring to spend the extra $30 to get the phone that they want, but will they spend an extra $150 or $200? That remains to be seen; we’re seeing $199 as an upper limit right now.

Nokia is talking about the N900, which is an unsubsidized phone coming in at about $870. That  just says there’s absolutely no mass market for that device at that price point period.

What has been and what will be the impact of the $99 iPhone 3G ($529.00) on the smart phone market?

MG: We’re going to see more vendors getting phones into that $99-$199 space. Apple was wise to lower the bar and be able to get that out. Even going from $99 to $199 Apple will pick up those customers, and we’re going to see other vendors trying to push down into that direction as opposed to people trying to get above $199 as a price point. It would be really interesting to see how a Touch Pro 2 introduced at a $199 price point could be selling against the competition.

How will Android play a role in the merging between feature phones and smart phones?

MG: The thing with Android is it becomes a question of what the carrier and the vendor will do with it. The first iteration we’ve seen has been very incomplete. In HTC’s Hero, HTC really spends a lot of time revamping every part of the operating system, filling in missing pieces, bringing things in like Exchange functionality which should be standard table stakes for every smart phone and yet it’s not on stock Android devices.

We’re going to have to watch how that plays out. At times it looks like Android’s one of those 80-percent projects, and sometimes it looks like it’s a 20-percent project, and I think Google has to decide if this is a strategic product for them; are they really going out there to evangelize it, or does it just become the equivalent of desktop Linux?

In fact, a lot of the Android licensees we’re seeing are also Windows Mobile licensees. I think there’s going to be a lot of experimentation around Android, but a potential fragmentation could end up hurting the platform before it has a chance to pick up traction.

With more and more consumers switching to smart phones, could that push carriers to drop data prices?

MG: The same way carriers learned that as cell phones became mass market mainstream devices, they dropped the price of per-minute usage and their revenues grew astronomically, and the same thing is going to have to happen with data.

We’re starting to see carriers drop things like capping your data usage at ridiculous sums. Carriers are going to have to embrace more reasonable data prices and augment that with value services to drive consumer usage. We’ll see the price point of raw data access drop, particularly as carriers are in the process of building out their next-generation networks. But look for more services trying to get consumers to take advantage of those networks and charge them something for that.