The rise of no-contract smartphones

8:30 AM nocontract, smartphones No Comments

| By Michelle V. Rafter, MSN Money

With Apple’s new iPhone 5S and 5C devices, the company joins others cutting the cord between mobile phones and contracts.

Buried in Apple's announcement of not one but two new iPhones last week was news that anyone can buy one of the devices without having to sign up for a two-year contract.

The news makes Apple the latest company loosening the connection between phones and contracts to make their products and services more appealing to customers.

That's not to say the new iPhones are a bargain. Buy the top-of-the-line iPhone 5S with a two-year contract, and you'll pay $199 for a basic 16-gigabyte model. Without a contract, the same phone is $649.

Prices for the less tricked-out iPhone 5C, built with a candy-colored plastic case instead of glass and aluminum, start at $99 with a contract. Without a contract, you pay $549.

Apple's move is being taken as a sign of its renewed push to sell products in places like Japan and China, where buying a phone without a contract is more common than in the United States. When Apple starts shipping new iPhone 5 models to U.S. customers on Sept. 20, shoppers in China and elsewhere for the first time will be able to pick one up the same day, instead of waiting weeks or months.

Before the new iPhones were introduced, analysts and Apple watchers had expected the company to debut a cheaper phone specifically for consumers seeking a noncontract device, so the relatively high price of the iPhone 5C surprised some. "We view the lack of a true 'low-end iPhone' as disappointing," Merrill Lynch analyst Scott Craig wrote after the announcement. "We believe the 5C is unlikely to be competitive in the lower-end smartphone market, where phones tend to be under $300 (prepaid phone with no contract)."

One of the chief reasons for getting a no-contract phone is flexibility. Without a 24-month agreement tying you down, it's easier to switch carriers if you're not happy with your service, data plan or other terms.

Not having a contract also makes it simpler to upgrade when the next generation of Apple, Samsung or Nokia phones appear, which typically happens more frequently than the average 24-month cellphone contract.

No-contract phones may be more popular outside the United States, but the past year has seen major U.S. carriers such as Verizon, AT&T and T-Mobile ease up on contract policies and restrictions.

The Verizon Edge plan, introduced in August, lets customers pay for a new phone in 24 monthly installments instead of in a lump sum up front. Customers on the plan can upgrade to a new phone after six months if they've paid off at least 50% of the cost of their existing device. Customers need to have an existing Verizon contract to qualify for the new plan, which covers smartphones and basic cellphones but not tablets; once they do, though, there's no long-term service agreement.

AT&T unveiled the similar AT&T Next plan in July. With it, customers pay for a new phone or tablet in 12 monthly installments, and once the device is paid for, they can keep it or trade it in for a newer model. AT&T Next, like no-contract plans from other carriers, doesn't include the upgrade and activation fees typically included in long-term contracts.

T-Mobile was the first company to unbundle phones from services, announcing in December 2012 that customers would have to pay $300 to $800, or more, for a phone up front or in installments added to their monthly bill, part of a move to position itself as the "un-carrier."

Since then the company has picked up 1.1 million new customers, according to InformationWeek. Customers are moving to T-Mobile because the company is "fixing the things that drive them mad, like contracts and upgrades, and freeing them from the two-year sentences imposed on them by our competitors," T-Mobile CEO John Legere said in August when the company announced its quarterly earnings.

Other major tech players reportedly are considering the no-contract phone market. Reports surfaced recently that Amazon could be developing a smartphone patterned after the Kindle that would be sold without requiring buyers to sign up for a lengthy service contract. According to a Digital Trends report, Amazon phone users would buy music, books and other media through Amazon, much the way Apple users buy from iTunes and Android phone users get downloads through Google Play.

Amazon responded by saying it will not launch such a phone this year, and that if and when it does, such a device won't be free. However, the company reportedly is also testing a wireless network, fueling rumors that a phone is on the horizon.

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NYT: Apple's world lead in smartphones isn't safe

2:11 PM Apples, smartphones, world No Comments

BARCELONA  — When Ellie Turner decided she wanted an upgrade from her iPhone 3G, she expected to pay more for Apple’s new iPhone 4S than for the other leading smartphones on the market.

Instead, Ms. Turner, a public relations specialist in London, got the fast-selling device free.

She consulted Phones4u, a bulk discounter of cellphones and data packages, which offered her a free iPhone 4S and data plan for ?2, or $3.20, more than what she had been paying each month. She returned to her operator, O2 U.K., which had been selling the 4S for ?99 with the same plan. She told people there about the rival offer.

“They didn’t blink an eye,” Ms. Turner said. “They matched it.”

Apple, the global market leader in smartphones, is enjoying record profits and sales that have transformed it into one of the world’s most valuable companies. But the mobile computing industry it has conquered in just five years is changing rapidly, and nothing, not even Apple’s vaunted brand premium — the ability to charge more than its competitors for premium smartphones — appears guaranteed.

In Britain, for example, the iPhone 4S costs at least ?170 more than the Samsung Galaxy S II with a two-year commitment at O2 U.K. At T-Mobile in Germany, the Samsung model costs about €80, or $108, and the 4S €130. In the United States, the difference between the two models at AT&T is at least $50 and as much as $250.

The premium is Apple’s reward as progenitor of the modern smartphone segment: the sum of its software DNA, intuitive user experience, cash-generating universe of applications, cultivated image of hipness and first-mover advantage.

But Apple’s main rivals — Samsung and other sellers of cellphones using the Google Android operating system, like HTC of Taiwan and Huawei and ZTE of China — are making smartphones for much less, and the iPhone is becoming ubiquitous, threatening to dull its cachet.

For now, said T. Michael Walkley, an analyst at Canaccord Genuity in Minneapolis, the iPhone lineup has momentum and Apple, based in Cupertino, California, should be able to pad its lead over its rivals this year.

“But I cannot say with certainty that five years on, Apple will still be on top,” Mr. Walkley said, noting that Apple and HTC did not even make smartphones six years ago. “I assume they will be, but it is difficult to predict anything in this dynamic market.”

Mr. Walkley estimated that Apple had captured 52 percent of all profits in the smartphone industry during 2011, a share he expected would increase to 60 percent this year.

Apple, following its tradition of participating only in its own promotional events, has no formal presence or exhibition stand at the Mobile World Congress, the industry’s largest annual convention, which begins Monday in Barcelona.

An Apple spokesman in London, Alan Hely, said the company had no comment for this article.

Timothy D. Cook, the Apple chief executive, told a Goldman Sachs investment conference this month that Apple would not rest on its laurels after its record fourth quarter, in which it sold 37 million iPhones — 17 million more than it had ever sold in a quarter.

Tongue in cheek, Mr. Cook called the 37 million “pretty good,” drawing laughs, but then put it in stark perspective: “As I see it, that 37 million for last quarter represented 24 percent of the smartphone market. So three out of four people bought something else. And it represented less than 9 percent of the handset market, so 9 out of 10 people are buying something else.

“The smartphone market last year was a half billion units,” he continued. “In 2015, it is projected to be a billion units. When you take it in the context of these numbers, the truth is, this is a jaw-dropping industry. It has enormous opportunities to it. Up against those, the numbers don’t seem so large anymore.”

Carrying the iPhone has benefited operators, who use it to lure new customers. Sprint, the No. 3 U.S. carrier, sold 1.8 million iPhone 4S’s in the fourth quarter, its first sales of Apple models. In that period, the operator added 1.6 million new customers, the biggest such increase in six years.

Deutsche Telekom, France Telecom and Vodafone have also spoken of the positive effect iPhone sales have on their profits. But over time, the iPhone could be undermined by its own success.

“All of a sudden, every teenage girl has an iPhone,” Mr. Walkley said. “The real danger is that Apple becomes so mainstream that there is a breakaway by consumers to something new.”

Apple’s competitors are waiting for that chance, said Mark Newman, the director of mobile research at Informa Telecoms and Media, a research firm in London.

That puts pressure on Apple to continue innovating with each new iPhone. Mr. Newman said that Siri, the Apple voice-activated command function introduced with the iPhone 4S, had been an incremental improvement, not a paradigm change.

“Apple is focused on defending the high end of the market and that is becoming harder to do each year,” he said. “Competitors, such as the Galaxy from Samsung, are starting to catch up. I think it is inevitable that the margin pressure increases.”

So far, there is no sign of that pressure at Apple, which continues to derive more than 40 percent operating profit from the sale of each smartphone, Mr. Walkley estimated.

In 2011, Apple became the world’s largest buyer of semiconductors, according to Gartner. It displaced LG of Korea as the No. 3 maker of mobile phones by volume, trailing only Nokia and Samsung. Apple narrowed the lead held by Android, the free operating system developed by Google. By December, 44.5 percent of all U.S. smartphone buyers were choosing iPhones, up from just 25.1 percent in October. The proportion choosing for Android fell to 46.9 percent from 61.6 percent, according to Nielsen.

Patrick Remy, the vice president of devices at France Telecom in Paris, said he saw no sign of the Apple brand’s diminishing. On the contrary, Mr. Remy said, Apple and Samsung have the financial resources to invest in the marketing, image and innovation that are needed to stay a step ahead of the competition.

“We are not seeing any major part of these brands declining,” Mr. Remy said.

But competition, especially from lower-priced rivals, is not standing still.

By 2016, more than half of all smartphones sold will cost less than $300, according to Informa. Last year, 81 percent — most of them iPhones — cost more than $300. The proportion costing less than $200, which currently makes up 5 percent of the global market, is expected to increase almost fivefold, to 24 percent, by 2016.

It is unclear what effect a proliferation of low-priced smartphones will have on Apple’s niche. But Shao Yang, the marketing director for mobile devices at Huawei — the Chinese maker of mobile networking equipment which has set a goal of being among the world’s top three cellphone makers by 2015 — said consumers would be able to obtain superior performance for less in the future.

“I think currently the biggest trend is not the price, but the capability,” Mr. Shao said. “There is a competition in capability. The function of the phone will change very fast.”

Huawei, based in Shenzhen, sold 20 million smartphones last year, up from 3.1 million in 2010. Huawei sold about half of its smartphones in China for between $150 and $200. Its biggest foreign market is the United States, where Huawei in January presented the Ascend P1 S, calling it the thinnest smartphone at 6.65 millimeters, or 0.26 inch.

The P1 S will not start selling until April and Huawei has not released the price. But Mr. Shao said it would cost less than an iPhone. “Smartphones are going to become cheaper and cheaper,” he said.

Apple, despite the higher prices of the 4S, is not unrepresented in the low-price smartphone segment. The iPhone 3, a predecessor, is being given away with a ?16.50 plan at O2 U.K., while the iPhone 4 is free with a ?36 plan.

This story, "Apple Riding High, but for How Long?" originally appeared in The New York Times.

Copyright © 2012 The New York Times

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