The 3G handset quandary

Prices for next-generation cell phones edge up while predicted demand for the handsets shrinks. What's a cell phone operator to do?

The average price of cell phones using next-generation wireless technology will creep up $3 during the next few months, cell phone chipmaker Qualcomm said this week.

The increase, from $212 to $215, illuminates the cell phone industry's failure so far to make an important piece of its future more affordable to the mass market. Industry observers consider lower prices for phones based on WCDMA (wideband code division multiple access) key to making the devices as ubiquitous as the cell phone industry would like.

Qualcomm this week lowered its estimate of the number of WCDMA handsets expected to ship this year from 50 million to about 45 million, although the company did not blame phone prices for the decreased shipments.

Nokia, the world's No. 1 handset maker, also noted this week that WCDMA average selling prices are up, but executives addressing financial analysts didn't disclose by how much.

"The WCDMA market in 2005 will either be in line, or slightly lower, than what we previously estimated," Nokia Chief Executive Officer Jorma Ollila said during a conference call with financial analysts this week.

WCDMA is just one of many standards to manage the digital bits that make up cell phone calls and wireless Internet sessions. But it's perhaps the most important one because it's at the finish line of a long and expensive effort to build networks that can accommodate billions of minutes of cell phone conversations and better compete against cable and landline phone providers by providing high-speed Internet service.

Hundreds of cell phone operators plan to build or lease WCDMA networks in order to increase calling capacity and generate more revenue by selling high-speed Internet access rivaling that available via cable or telephone lines. Along with that service, cell phone operators would market handsets with cutting-edge features such as video players or megapixel video cameras.

That makes WCDMA technology attractive but also increases pressure to keep handset prices as low as possible. Even slight increases can eat into the profits of operators, who typically subsidize a percentage of handset prices to help sell cell phone services to consumers. Nowadays, splurging on a cell phone means paying about $130 for an LG VX8100, a cutting-edge handset capable of playing videos or music stored as MP3 files. At full retail, the handset would cost at least $50 more. In the U.S., phones are often so heavily subsidized they are free to customers who buy phone service.

Qualcomm is facing pressure to lower WCDMA handset prices mainly because the chipmaker owns many of the standard's patents. Licensing these patents to manufacturers has become a big business for the company, accounting for about 36 percent of the revenue it generates through all its licensing agreements with manufacturers.

An immediate goal for Qualcomm seems to be getting WCDMA handset prices below $200 per handset. There will be two such phones, from different and as-yet-unnamed device makers, on the market by the end of the year, Qualcomm Chief Executive Officer Paul Jacobs told financial analysts during a conference call this week to discuss its latest earnings.

"Prices will get even more dramatically lower" in the years that follow, he added.

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