Seybold's take: It's time to experiment with device pricing

Andrew SeyboldWow! There certainly are a lot of new smartphones, tablets and other devices hitting the market this summer.  Almost every day we see another announcement about a new device being introduced on one of the networks and reviewers are having a hard time coming up with enough superlatives to cover them all. Back in the days when new desktop and laptop computers were being introduced at a furious rate, it finally reached the point where most device specifications were assumed and only those that differentiated the product in some way were discussed in the reviews.

It is even tougher with smartphones since the real differentiator is in ease of use, which is largely due to the operating system rather than the device itself. Android has certainly come on like gangbusters, and I believe the main reason for this is that each handset vendor, in conjunction with a network operator, can modify the user experience. This is leading to easier and more fun-to-use phones. Of course, the gold standard for consumer ease of use is the iPhone, which changed all of the rules of the game.

But the number of new devices entering the market is creating several quandaries for consumers. If they are tied up in a two-year contract, they can only watch as some of their friends switch to the latest new phone and mark the date on their calendar when their network provider will allow them to trade up to a new phone (by which time there will be even more in the marketplace). The upside of having a two-year contract is that you can purchase the phone or device for less than it would cost without the contract.

Apple's attempt at selling the first iPhone without a subsidy was partially successful, but it wasn't until the new 3G model was introduced and was subsidized by AT&T that sales really kicked in. Some network operators offer smartphones at good prices along with prepaid, no-contract service. AT&T, for example, is offering 3G service for the iPad on a month-to-month basis and is good at monitoring usage and suggesting a different rate plan for the next month based on your previous month's usage. However, most devices are subsidized and therefore require a two-year contract.

Another issue is that sometimes the latest and greatest new device is not available on your network so you would have to change networks to buy and use the phone. Here again, contracts can stand in your way. The practice of subsidizing device pricing with service contracts is being debated, but we need to be careful. Several years ago, the Japanese government stopped allowing network operators to charge lower prices for phones based on multi-year contracts. As a result, phone prices rose and those who had changed phones most often (15-25 year olds) stopped buying new phones and the handset market suffered.

I am not suggesting that network operators should sell the phones at lower prices with no contracts. That would only prevent them from making money on the device and they could face the possibility of losing money on customers who switched to another network. However, I do believe that there are several options that could be explored.

The first option was tried by Apple: Pay more for a phone and pass on the contract, or pay less for the phone and sign a contract. I am not sure this approach was given enough time to take hold, and that was also before most of the network operators adjusted their no-contract monthly pricing to reflect their interest in this type of customer. It might be time to try this again.

Pricing models are in flux. We are seeing many different models today and will certainly be seeing more when LTE systems are available later this year. What is the best pricing model for everyone? I don't believe there is a generic answer to that question, but I like the model of one wireless subscription per subscriber or family, not per device. We are heading into a time when we will all be carrying several different devices. At the moment, I carry three and sometimes four, and each requires a service agreement. My iPad is month-to-month with AT&T, but my other devices are under contract with various network providers. Most people don't carry as many devices as I do, but pricing models will still have to change as we begin to carry more devices.

Some pricing can be like with the Amazon Kindle where I never paid for Sprint's service since the cost of the books I bought included the use of its 3G network to send them down to my Kindle. Other models might include advertising augmented plans (some are being tested now), but the per-person or per-family plan is one I really like and I think we are drawing closer to it becoming a reality.

We have to separate voice and data pricing here and customers should be able to separate them as well. Data will have to be addressed in terms of data usage to ensure that we don't run out of network capacity, but networks already offer a pool of data to corporations to be spread out across devices so, it follows, I could have a pool of megabytes to use every month and could use them across different devices with a single bill.

Handset vendors will continue to introduce new and innovative devices and network operators will continue to promote them. The issue then is for consumers to decide how much the next great device is worth to them, and either stay with their existing device or pay the price to move up. And, by the way, as soon as they do move up, there will be another, even greater device on the market. That is what free markets are all about.

Andrew M. Seybold is an authority on technology and trends shaping the world of wireless mobility. A respected analyst, consultant, commentator, author and active participant in industry trade organizations, his views have influenced strategies and shaped initiatives for telecom, mobile computing and wireless industry leaders worldwide. www.andrewseybold.com.

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