25 February 2009

Why Are Smart Phone List Prices so High in Australia?

This article from The Australian IT gives the following prices for the following Windows Mobile phones

Sony Ericsson  Xperia X1 AU$1,499. 800x480 pixel 3in  touchscreen, 3.2 megapixel camera, GPS, WiFi, Bluetooth, 7.2Mbps HSDPA, slide-out QWERTY keypad
HP IPAQ 912c  AU$1,499. 800 by 480 3.8in touchscreen, 5 megapixel camera, GPS, WiFi, Bluetooth
XTC Touch HD AU$849. 320 by 240 pixel touchscreen, 3 megapixel camera, GPS, WiFi, Bluetooth, 7.1Mbps HSDPA, QWERTY keypad 
This EDN  article says iSupply estimated the iPhone 3G BOM (bill of materials) to be US$173 in 2008 and predicted it to decrease to US$148 in 2009. Some of the component costs listed in this article were (in US$)
  1. iPhone display $20 
  2. iPhone CPU $13.50
  3. iPhone HSDPA digital baseband $15.00 
  4. RF Transceiver $4.25 
  5. 2MPix digital camera $7.00 
  6. GPS $3.0
Even with the higher resolution displays and cameras on the Australian Windows phones, it is hard to see how BOMs could be more than US$200, which is around AU$300 at current exchange rates. So where does the remaining AU$650 -AU$1,200 in the phone prices come from?
This blog recently looked at the mobile device value chain . Mobile phone manufactures are the "OEMs" in this value chain. They sell devices with software installed and their products comprise
  1. Components and assembly (BOM)
  2. Operating system
  3. Software applications
  4. Integration, testing, usability.
  5. Marketing, sales, advertising
  6. Support
This makes up the prices that sales channels pay. Distributors and retailers will mark up these prices to get the retail prices for the three phones listed above. Dealer markups of ,say, 50% would give dealer pricing of   AU$430 - AU$800 for the three phones

Components and assembly should be around AU$300 as mentioned above. The OS is unlikely to cost more than 10% of BOM. That makes the cost AU$330. Therefore the OEMs are charging 30%-110% of the cost of manufacturing, or AU$100 - AU$470 per handset, for software + integration + marketing + support

Considering how alike all smart phones are, specialized third party companies (e.g Wind River and Mobile Complete ) should be able to do integration, testing and support cheaply. It is hard to know what sales and marketing costs are but I will assume they are low for now. All in all it seems that smart phone prices are high compared to costs. Some possible explanations for this are
  1. List pricing does not reflect actual street pricing.
  2. OEMs are making big profits.
  3. OEMs are developing phones inefficiently.
  4. OEMs are adding a LOT of software to their phones
 In a future post I will attempt to determine which of these factors are most important.


Neon Leon said...

Take a look at http://www.technation.com.au/2009/02/23/google-android-vs-apple-iphone-in-australia/

ARPUs for G1 and iPhone are $800 and (way) up. Put these numbers in your revenue calculator!

24 Month Optus Contracts
$74 for 500MB
$92 for 700MB
$122.95 for 1.5GB – free calls to any Australian number
$132 for 3GB – free calls to any Australian number

24 Month Optus Contracts
$79 cap for 1GB

$99 cap for 3GB

Peter Williams said...

Done. The model is in http://peterwilliams97.blogspot.com/2009/02/mobile-phone-advertising-done-right.html

The $70/month pricing is in row 13. It gives Telstra mobile revenue of close to $15B p.a. or about 4.5x current revenue.

Thanks for suggesting this.