Over the last week there has been quite a bit of chatter about price cuts happening on the Z10. To recap what’s happening here, both AT&T and Verizon have lowered the 2-year contract price of the phone to $99 while some retailers such as Amazon and Best Buy have dropped the price to $49.
There are a few things worth pointing out here. First of all, it’s very normal for the big retailers to drop pricing below that of the carrier branded store. They earn a commission on selling the hardware with a contract and they are often willing to dip into that commission to further subsidize the price of the phone. So I wouldn’t pay too much attention or be overly concerned with the $49 sticker price there.
In fact Amazon has a wacky history of making on-contract phones absurdly cheap to the point that one of my good friends, a former carrier VP who brought the first GSM BlackBerry to the US market, once told me to completely ignore Amazon pricing since it bears no reflection on actual device pricing.
So let’s think about the Z10 and what $99 contract pricing means. The negative commentary basically points out that a 4 month old phone shouldn’t be seeing price cuts yet unless it’s not selling well. The defensive argument, if you want to call it that, says this is normal business behavior. In fact, BlackBerry told the Wall Street Journal, “It’s part of life cycle management to tier the pricing for current devices to make room for the next ones.”
What’s the truth? As usual, I suspect it lies somewhere in between the two versions of the story. I’ve been following BlackBerry for a very long time. When I was officially covering the stock as an analyst I’d see a promotion, or hear about one, and then have to immediately do my homework and figure out if there was anything special about it. People always wanted to know if the promo was sponsored by BlackBerry, or if the carrier was putting up more money to gain a subscriber on a contract. For a while, Verizon was running a highly successful “buy one get one” (BOGO) offer on BlackBerry and it had a very clear positive effect on subscriber growth.
What’s the truth? As usual, I suspect it lies somewhere in between the two versions of the story
Today the market is more competitive, and smartphone demand is more about upgrades or platform switches than it is about capturing new first-time users. At least that’s the case in the US, where these promotions on the Z10 are happening. So it’s natural to see aggressive promotions as more of a negative for a vendor than a sign of a coming burst in sales.
Given last quarter’s results, I think pretty much everyone realizes that the Z10 hasn’t been as successful as many of us hoped. So there’s definitely some potential truth to the idea that lower demand spurred the price cuts. But at the same time, let’s not look at things in a vacuum. AT&T recently put on a promo for the iPhone 5 at $99. Best Buy and Walmart have also put Apple’s latest phone on sale since the summer started.
So we have to consider that this isn’t a BlackBerry issue. It may simply be retailers and wireless operators getting more aggressive in how much they’re subsidizing phones in order to gain high-value subscribers. Let’s not forget how much a 2-year contract is actually worth (in revenue) to a carrier. If your bill runs you $60 per year then you are paying $1440 over the life of your contract, and lots of people have bills that run much more than this. Pricing for cellular voice and data in the US and Canada isn’t exactly aggressive, regardless of what the carriers tell the regulators. If the monthly rates aren’t aggressive then it sure makes sense for the sticker prices on phones to be very aggressive. Suck them in with cheap prices and keep them hooked on expensive monthly plans. That’s the carrier model around here.