Who buys phones? In most markets it's not actually consumers - it's network operators. How come? In markets where there are phone subsidies (which can be as much as €250 per phone) the effect of network operator subsidies distorts the market.
So what form does the market distortion take?
Firstly consumers find it impossible to differentiate between different devices - if all the devices are the same price (somewhere between €50 and free) then how do you make a choice between different devices? There isn't a way for manufacturers to signal different advantages, or to differentiate between devices as there is in any normal purchase, where price conveys part of the information to the consumer. (higher price indicates a combination of more exclusive/higher quality/more features)
So how are phones sold?
They are sold in massive quantities to purchasing departments at major mobile operator groups. These groups make decisions to compare devices on bulk discount pricing (sustaining Nokia's market share advantage - as they can bulk source components better than anyone else) - and on features that fit into different parts of their product portfolios.
This behaviour tends to lead to feature creep as manufacturers try to win sales against other manufacturers by offering "more features at the same price" - and tends to discourage novel new devices that may sell in small volumes - as sales wins are based on bulk discounts and volumes, it's safer to buy the phone that is an evolution of the phone that sold big last year.
In europe there are some markets where this dynamic doesn't happen though - Italy is an interesting case study here. In Italy phone contracts are traditionally pre-paid, so the opportunity for the significant subsidies that exist in post paid markets don't exist. Thus phone carry the full "sticker price".
How does this look in reality? Let's look at an example - the Samsung Tocco Ultra on Vodafone
UK offer - free
Italian offer - €399
Quite a difference.
What is the result? In Italy consumers buy more expensive, high end smartphone devices than in the UK.
Yes, that's right Italian consumers buy more expensive phones.
When I see discussions on the battle for operator subsidies by phone manufacturers - I think manufacturers miss the point - if they were to focus on creating the products that consumers want, they would end up with longer term successes, though with some short term challenges in convincing buyers at operators to take their handsets.
Well said. After several years of trying to fix this insanity from outside in Symbian and TI I joined an operator to try and fix it from the inside. Actually strike that, I realised that the only hope for fixing this probelm was Apple and built an iPhone software comany.
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