HSDPA handset pricing
Posted by Mark Newman
January 21st, 2008
We’re expecting a lot more HSDPA mobile phones to come onto the market this year. The big question is how competitive these will be - in terms of retail prices - with 2.5G and 3G devices. Research by Informa Telecoms & Media indicates that the average selling price (ASP) of an HSDPA handset will be around $400 in 2008, more than twice that of a 3G handset. Will mobile operators try to pass these higher costs onto end users? If so, they’d better have some pretty good marketing messages up their sleeves?
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The segmentation of the handset market is creating huge differences in handset requirements in terms of components and as a result the price differential continues to widen between basic phones and low feature phones on one hand and feature rich phones and smartphones on the other. The price gap between these two groups might split the handset market into two main price clusters - the low-cost market and first-class and premium handsets.
Mobile handset ASP by market segment
Globally, the ASP is expected to continue to decline sharply until 2008. This erosion of ASP is attributed to a number of factors including:
* The increasing competition among device vendors as described earlier in this chapter.
* The desire to sell greater volumes in the low-end segment, particularly in emerging markets - mainly China, India, Africa and parts of Latin America. Although, in these regions the mobile phone penetration level is still low, and so have the potential to could generate volume sales, subscribers generally have a low disposable income and cannot afford to buy expensive high-end models.
* The still-low penetration levels of 3G services in the Americas and Africa, while some key regions such as India and China have not even launched these services yet. On the other hand, a number of features and technologies related to 2.5G services are now becoming commoditised (for example, colour displays, camera, ringtones, Java and intelligent text input), which means the price is the main differentiator for selling these devices.
* The decreasing cost of maturing technologies will significantly help in reducing the overall BOM as economies of scale build, which will in turn have an impact on the ASP of the mobile handset (see early sections of this chapter and Chapter 9 for more details)
Mobile handset vendors are adopting two main strategies to slow the decline of the ASP. The first is through marketing; vendors are seeking to increase the loyalty to and value of their brand, encouraging consumers to pay a premium for their devices. At the same time, in order to offset the growing volume of low-end devices that erode the ASP, vendors are looking to release increasing numbers of advanced devices offering advanced features that can command a high ASP. This trend will be encouraged by the takeoff of mobile broadband services in developed regions including Europe, North America and the developed countries in Asia Pacific, which will mainly boost the ASP for feature rich phones and smartphones. The increased penetration of 3G services in Latin America and Africa and the launch of these services in China and India, hopefully by 2008, will have also a great impact on stabilising the overall ASP, but this will mainly be associated with feature phones.
To tackle the falling ASPs, device vendors are now trying to push a number of new features to the end user including advanced codecs for enabling quality music and video playback on the phone, Bluetooth, WLAN, enhanced user interface, navigation systems and others. As consequence the worldwide ASP across all segments of the mobile handset market is expected to stabilise at around US$116-120 after 2008.
In addition to falling ASPs, convergence is threatening to rewrite the rules within the mobile handset value chain. The introduction of new technologies threatens to undermine the position of not only mobile network operators, but also of device vendors if they do not respond. The potential to offer more compelling experiences on mobile devices is encouraging new entrants, such as Apple, Google and several less well-known vendors, to enter the lucrative mobile handset industry, which might increase competition and put more pressure for vendors to lower their ASPs even at the high-end segments of the market.
Informa Telecoms & Media believes that over the next two years the handset industry is heading towards a period of increased competition and lower margins. The margin across all the mobile phone vendors is expected decrease from an average of US$22 in 2007 to less that US$15 in 20012. The result of this will be increased consolidation and diversification by handset vendors to sectors outside, but related to, the mobile handset market.
The ASP for basic phones is estimated at US$42 in 2007, a 20% drop from 2006. Although, sales of basic phones will be driven by emerging markets, a number of consumers will be replacing their basic phones with higher capability feature phones. Consequently sales of these phones are expected to decrease over the years and are unlikely to exceed 94 million units in 2012 representing only 6% of total sales. After 2009, the lack of demand of these devices will force manufacturers to upgrade their product to more attractive feature phones because margins for basic phones will very thin - in the range of US$3.50. After that year, the basic phone market will become a niche market that will be addressed only by established manufacturers that can manage to attract demand from various operators in emerging markets.
The ASP for low feature phones has currently reached an average of US$74 down from almost US$97 in 2006. Because of the tough competition in this market segment, the average vendor margin for these phones is expected to decline over the years and will hardly exceed US$6 after 2009. By 2012, the ASP of these devices is expected to be almost half the 2006 figure, less than US$50.
The gap between the ASP of feature rich phones and low feature phones continues to widen. Low feature phones require less complex terminal software and low performance hardware, including memory, processing and screen resolution. In contrast, feature rich phones come with advanced hardware and software sets and incorporate a multitude of rich features including advanced UI, sophisticated codec for music and video playback, Wi-Fi, Bluetooth, GPS, HTML browsing, higher generations access network or SIP functionality, which make them more expensive. The most expensive components of feature rich phones include the wireless modem, the multimedia framework and the display. Additionally, because these phones handle a number of high-end features, they traditionally incorporate advanced software solutions.
Mobile handsets ASP by wireless access network
In 2007, the ASP of 2G handsets is estimated to have fallen to US$38 (~24.2% year on year decrease), the ASP of 2.5G handsets to US$116 (~23% year on year decrease), and the ASP of 3G handsets to US$217 from US$318 in 2006 (~32% year on year decrease).
The handset ASP for 3.5G and higher generations is still very high as current demand is weak and also because these devices are designed to support true mobile broadband services and therefore embed very high-end application features, which require advanced hardware and software designs. The ASP of this category of devices is expected to remain very high for the foreseeable future, only declining an average 7.5% year-on-year until 2009-2010. After this period, mobile broadband services are likely to reach mass market which will significantly help the ASP to come down to the affordable limit. The ASP of 3.5G devices (largely HSDPA and EV-DOrA initially) is likely to go below the US$300 barrier in 2011 and below US$250 in 2012. After this date, the ASP of these devices will decline sharply over the years and it will beat the US$100 mark in 2014 or soon before. However, the overall ASP for 3.5G+ handsets (including HSUPA, HSPA+, CDMA EV-DOrB, LTE, UMB or multimode WiMAX-cellular devices) is likely to remain high.
