Jonathan Schwartz of Sun writes:
How much did your cellphone cost you? What’s the average price of a handset? What’s the average operating margin for a carrier’s handset business?
The answers to those questions give you no clue whatever to the health of the handset industry. Why? Because the devices are sold to consumers as part of subscription calling plans, whose long term value is sufficient to drive some relatively crazy discounting in the carrier’s retail outlets (go check them out, now that carrier’s kiosks are popping up everywhere). The same handset from multiple carriers can range from free to $799. And as mobile data services increase in value (even if most folks over 30 don’t even know what a ringtone or game download is), the insanity (or sanity) at the checkout counter will only quicken.
And as I was saying on Steve’s Gillmor Gang, give it a year, I’ll make a big bet, you’re going to see the same thing begin to happen in the PC industry. Will the average selling price (ASP) of a PC continue to meander south? Yes. Unrelated to component cost. Will it go to free, like handsets? Absolutely. In exchange, consumers will sign up for network plans, DSL, cable, you name it. On PC’s, or more likely equivalent dedicated devices branded by carriers – just as in the handset industry, where carriers are increasingly deploying ‘branded’ handsets. It’s been a tad tougher on PC’s when they didn’t control the software load, but it’s just a matter of time.
This is the foundation of the pricing distortion that occurs when networks, time and value blend. It’s how Echostar and DirecTV subsidize satellite dishes, cable companies subsidize set top boxes, and how carriers sell handsets. Take out the network delivery part of the equation, it’s how magazines sell subscriptions (first 6 months free). The spot margin is less interesting than the number of subs, ARPU, churn – and longer term EBITDA. Terms the PC industry will learn to respect, it’s inevitable. Maybe not in the enterprise, where purchasing agents are fixed in their ways, but surely in the consumer marketplace, where “NO MONEY DOWN!” is popular signage.
So what’s happening to the PC industry? It’s moving from the old world, in which one buys a PC and cares a great deal about its comparitive hardware features (does it have a DVD player?), to one in which the hardware is nearly identical, and the value’s moved to services available through the device. Over the network. Battery life matters more than processor speed. Size of display more than disk. Access to Yahoo! Personals matters more than all of the above.
This echoes what I wrote recently in my Business Standard column.