The handsets are a commodity, and by definition, their prices will come down as they catch up to the network.
Kent, I'll be willing to bet you just about anything that while worldwide ASPs may possibly drop due to increasing sales to second and third-world countries like China, India, Brazil, etc., ASPs in developed countries will rise over the next three years or so.
Nearly every argument about handset ASPs dropping and phones becoming commoditized stems from poorly grounded analogies to the PC industry. These arguments forget two things:
1. People make PC purchasing decisions with all the emotion of a calculus instructor. A few iMac buyers notwithstanding, we don't care much about how our computers look. What matters is what's inside the box. The CPU, DRAM, video card, etc. Meanwhile, what's inside the box will be available irrespective of the vendor. As for the user interface of a PC, that's the same irrespective of company as well, as it's provided by Microsoft. So when we decide what PC to buy, aside from possibly intangibles such as customer service, no vendor can differentiate itself from its competitors.
Now look at how handset purchasing decisions are made. People care tremendously about how different models look, feel, operate. Meanwhile, the user interface, both for the display and for the buttons/casing, is completely in the control of the handset manufacturer. They can work wonders with it, or they can screw it up royally. Those that do the former can very easily justify price premiums for their product.
And this is all in the present, a point in time in which the overwhelming majority of all handset purchases are made by people who only buy them to make phone calls. Let's look four years into the future, and see what features might be available on a number of mid-tier and high-end handsets in developed countries:
1. An advanced operating system (i.e. Epoc or Palm OS)
2. MP3 playback software
3. Voice Recognition support (not just voice dialing)
4. Streaming media playback software
5. A Bluetooth chip
6. PDA software
7. Color displays
8. Video game software support
9. GPS software
Other advanced features, such as an embedded digital camera, a virtual retinal display, docking station support, and videoconferencing support, may also be available, but they're wait-and-see propositions, so it's best for now to assume that they won't be there.
Anyway, the point is that the functionality of the average handset in the average developed country is going to increase tremendously over the next few years, and that it'll provide more ability than ever for innovative handset manufacturers to differentiate themselves from their competitors by means of a more intuitive, functional product; and since so many additional value-added features are being added, a number of consumers may prove much more willing to pay a premium to these handset manufacturers (I'm not naming any names lest I create an off-topic debate here).
Then there's the second fact that the PC analogy misses out on:
2. PC ASPs only took a dive in 1998, as the average user no longer felt that he/she needed the processing power provided by a bleeding-edge PC. For a long time, PC ASPs held steady, as, to paraphrase Bob Metcalfe, Gates took whatever Grove gave. Software, both business and game-realted, continually got more complex, precipitating the demand for faster CPUs and larger DRAM modules. At some points along the way, the increasing complexity of software allowed ASPs to actually rise, such as around the time Windows '95 first came out. It was only a couple of years ago that the bloatware designers could no longer keep pace with Moore's Law, and ASPs collapsed as a result.
Now compare this to what's set to happen to the handset market. The amount of microprocessing power, flash memory, and graphics capabilities that's going to be demanded to handle all these complex apps, not to mention the additional DSP power that'll be needed for 3G communications, will be way too much for Moore's Law to keep up with. Recent development announcements by Qualcomm and TI seem to reflect this fact as well. Both of them have announced that future chipsets will feature multiple CPU cores and multiple DSP cores. Feel free to guess what this will do to ASIC, DSP, and SoC selling prices, and the prices of the handsets that use them. Meanwhile, it should also be noted that all the software that's going to be coming pre-installed on a lot of these phones, from companies such as Symbian, Palm, PacketVideo, Nintendo, and SnapTrack, won't be coming for free either.
Last but not least, it should be remembered that carriers subsidize handsets based on the expectation that they'll make up for whatever loss they take on the handset sale by means of service fees. If all of these advanced data/video/video game/GPS/3G services get rolled out, the revenues obtained per subscriber by carriers in developed nations could rise significantly. So now we'd have a situation where consumers are willing to pay higher prices for phones off the bat, where carriers are willing to subsidize phone purchases more significantly, and where superior handset manufacturers were have a greater ability to differentiate themselves from their competitors than ever before. Doesn't seem like a commodity market to me.
Eric |
