Tuesday, May 14, 2013

Opposing Trends in Phone Prices

CNN has a story suggesting a sharp price increase for cellular telephones as wireless carriers do away with subsidies. Without subsidies, prices foe a high-end cell phone could go up by $300 or $400.

It is hard to predict how quickly that will happen, though. I have a hard time imagining that phone subsidies could completely go away over the next 24 months. In the meantime, advances in manufacturing will push prices lower, while new high-end designs with more features and components could cause higher prices.

So which effect will predominate? What I expect is that consumers will gravitate toward the $99 phone regardless of the level of subsidy. If subsidies go away relatively quickly, over a two-year period, that could be the equivalent of the iPhone 3. But if subsidies go away more slowly, it could be the equivalent of the iPhone 5. The important thing to note is that it is not easy to see the difference between the iPhone 3 and the iPhone 5. The newer model does some things twice as fast, and it has a longer battery life, and these are differences that are obvious to the experienced iPhone user, but they may not be so obvious to the new user in the store making the purchase decision.

What could happen, then, is not so much that phone prices change as subsidies fade, but that phone designs change instead. Prices could hold almost steady, or go up and down as the opposing trends get out of sync.