Could We See Wireless Carriers Subsidize Tablets?

Carrier subsidization of tablets may need to play a key role if the tablet market is going to get to the point where 100 million are being shipped per quarter worldwide.

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Price plays an important role in the consumer purchasing behavior. However, I do not believe it plays the only role. As product markets mature, people become more in tune with what they want and their preferences become refined. Those preferences translate into perceived value, which then dictate what people will pay for that value.

We see examples in every major consumer product segment of pricing hierarchy from low to premium, and consumers’ willingness to support a multitude of pricing structures. However, the higher the price of the product, the longer people typically hold on to them. This is why cars are built to last and TVs are held on to for an average of seven to eight years.

This is also a new dynamic hitting the PC industry. Consumers are now holding onto their notebooks and desktops for an average of four years and enterprises are keeping them in use for an average of five years. There was a time not too long ago when many enterprise IT departments refreshed the bulk of their computers every two to three years. Those days are long gone, and I don’t believe they are coming back.

Smartphones appear to be the product segment that’s now on a two- to three-year refresh cycle, and I believe it has everything to do with carrier subsidization. Keep in mind that in many emerging markets carriers still do not subsidize the cost of smartphones. In markets like India, Africa and other parts of Asia where smartphones are not subsidized, the hardware cost is still the key driver. But in many developed markets, carriers subsidize smartphone costs.

The bottom line is that carrier subsidization of smartphones is one of the leading reasons this market is accelerating the way it is. If consumers were asked to pay non-subsidized costs for their smartphones, not only would they not be refreshed as often, smartphone makers wouldn’t sell as many.

So an interesting question is: Why are we not seeing tablets being more heavily subsidized by carriers? Imagine being able to get the latest iPad for $99 (hypothetically of course).

LTE Is Still Immature

LTE (Long Term Evolution), the standard in the USA and quickly other countries for full 4G connectivity, is still relatively new to the market. Carriers have spent and are still spending huge sums of money to implement LTE and make it more efficient.

Like many technologies, network technology gets incremental upgrades over its lifecycle, which on average is about 18 to 20 years. Because we are still so early in the lifecycle of LTE, carriers are looking to recoup their initial investments in this new network infrastructure, which means they are very selective about the devices they subsidize. For devices they are willing to heavily subsidize, they need to believe they can sell tens of millions each quarter. Right now, that does not extend to tablets.

However, we may see that change quickly and I think the product that could spur this could be the iPad Mini.

Going Places PCs Can’t

One of the things that interests me most about tablets is their ability to bring computing to places PCs can’t. Because they have larger screens than smartphones, more pure computing opportunities exist. We are seeing consumers and enterprises use tablets outside their homes and workplaces for far more than media consumption; many of them are doing a vast array of computing tasks. In fact, it is my opinion that the tablet is the purest definition of a mobile personal computer.

Currently, Wi-Fi tablets still outsell 3G- or 4G-enabled ones. Part of this has to do with the product adoption cycle of tablets, but it also has to do with the price. With the introduction of the iPad Mini, and a version being available with 4G technology, I think a scenario may be brewing for carriers to begin to subsidize this particular device. I believe its size and its current non-subsidized price make it the strongest candidate to do so.

As these carriers invest annually in network technology upgrades, they look to add more and more devices that take advantage of their network technology (in this case, 4G). The benefit of 4G rests solely on its advantages for speedy data networks, something tablets are more uniquely able to drive value to than smartphones. This, again, is why I think the seven- to eight-inch tablet form factor is very interesting to carriers.

Imagine being able to get an iPad Mini for $199 or even $99 with a two-year contract, or a seven-inch Android tablet for the same price or even possibly free. This would obviously be an attractive price proposition for the market. My guess is that the data pricing in this scenario would have to be drastically different than it is today; if they were to subsidize the cost of the hardware, the monthly fees would be steep.

This scenario is not probable in the short term, but it may be in the next two to three years. I could see a scenario where this begins to happen. Again, it would be based on the need for the carriers to get more data-heavy devices to monetize their networks. At some point in time, smartphones will not be enough.

On Apple’s most recent earnings call, CEO Tim Cook again stated his confidence in the belief that the tablet market is bigger than the PC market. On average, around 80-90 million PCs are sold every quarter, which means that Tim Cook and others at Apple believe more than 80-90 million tablets could be sold per quarter worldwide. I believe this is possible, but I think carrier subsidization of tablets may need to play a key role if the tablet market is going to get to the point where 100 million are being shipped per quarter worldwide.

It will be interesting to see how this plays out. The “post-PC” world is turning out to be a fascinating place.

Ben Bajarin is a principal at Creative Strategies Inc., a technology-industry-analysis and market-intelligence firm in Silicon Valley. He contributes to the “Big Picture” opinion column that appears here every week.