Why it's time to dump smartphone data plans

Why not? The cell phone market is stagnating-and worse while only a fraction of wireless customers own smartphones.

Time to dump smartphone data plans? Why not? The cell phone market is stagnating--and worse while only a fraction of wireless customers own smartphones. Any way you look at it, the global cell phone market appears to be in miserable shape.

Some recent headlines to consider:

• Motorola loses $3.6 billion

• Sprint Nextel announces plans to cut 8,000 jobs

• Nokia's profits plunge 69 percent

• New subscriber growth at T-Mobile USA (which coincidentally offers the only Google Android phone in the U.S. market) suffers a steep decline .

•  While the fourth quarter is usually the best time of the year for carriers, global vendor shipments fell in the period by more than 12 percent compared with a year ago.

Strategy Analytics, Bernstein analysis

Against this backdrop, the (increasingly few) optimists out there believe that smartphones will ride to the rescue of the wireless industry. Ryan Reith of IDC put it this way:

"As long as operators are able to continue to subsidize these devices, and developers continue to enhance applications, then this segment will be a silver lining to an otherwise gloomy market."

That's the conventional wisdom and it might be the right prescription during a normal period. But we're living through such a rough patch that not only is North America reaching a cell phone saturation point, but even the optimists at IDC worry that sales may wilt in the face of weakening demand, currency volatility, and reduced access to credit.

In tech-obsessed areas, such as Northern California, New York, Boston, and Los Angeles, you'll find lots of people who have traded up and bought fancier, higher-margin smartphones. They are in the minority. Fact is that smartphones represent 17 percent of the 1.3 billion mobile handsets expected to be sold around the world this year.

The rest may be dying from iPhone envy or whatever. But they ain't close to signing their name to the line which is dotted. The culprit: the exorbitant cost of the various data service plans.

I'm not concerned here with the geeks, the cool kids with the big bank accounts or the corporate types who can justify the purchase to their bosses. For the average Joe, who already pays a fortune for subscription television and Internet service, paying a monthly data service on a smartphone qualifies as a luxury that can be postponed until normalcy returns. A dowdy cell phone is more than enough to put you in touch with the wife and the kids and hey, you can also call Sal's Pizza for Saturday night delivery. Your cell phone may not run Google Latitude just yet. But trust me, Western civilization will survive.

In the meantime, I'd like to offer a modest proposal, courtesy of Bernstein Research's reliably incisive Toni Sacconaghi. In a note published Wednesday, Sacconaghi discussed the impact of the monthly charge for required data service and the effect on sales of Apple's iPhone. Here's the crux of the argument:

"Apple is effectively not participating in 83% of mobile handset market today. To more effectively address this part of the market, we believe Apple should offer an iPhone that does not require the user to sign up for a data plan. Note that we do not necessarily believe that a non-data plan iPhone needs to be priced significantly lower at retail than the current 3G iPhone ($199 in the US, with service contract), but waiving the data plan requirement alone would save users on the order of $30 per month, or $720 over two years-making it accessible to a much larger base of users."

Sacconaghi was writing about Apple and AT&T, but let's extend the analysis elsewhere. Maybe other carriers wind up subsidizing less of the upfront cost of their devices. (Or maybe not.)

That wouldn't be charity. There's a good business case to be made. In Apple's case, Sacconaghi estimates that a non-data plan iPhone represents an additional $7 billion in annual sales and $4 billion in gross profits (assuming 3 percent market share).

Of course, the carriers may deem this nonsense and instead decide to hold out as long as they can. It wouldn't be the first time they resisted change, but there are tens of millions of potential new subscribers up for grabs in an increasingly volatile world.

 

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