The danger in Verizon's new $299 phones

The danger in Verizon's new $299 phones
Since the introduction of the iPhone 3G, the standard cost of a smartphone on contract has been $199, but that is now changing in the world of Android phones, at least those released on Verizon. We're sure you've noticed recently, Verizon is trying to drive up the cost of top tier Android phones by offering lower subsidies. The new standard for top-tier Androids seems to be $299 on a two-year contract. We've already seen the DROID Bionic launch at that price, and the DROID RAZR set to be the same. And, leaked Verizon release schedules show the Samsung Galaxy Nexus and HTC Rezound (formerly HTC Vigor) are also expected to be the same cost. 

The pricing line

The last of the $199 Verizon smartphones seems to be the DROID 3, which features a dual-core CPU and qHD screen, much like the new high-end phones that are clocking in at higher prices. Verizon seems to want to price dual-core LTE phones at $299, while putting single-core phones, like the HTC Rhyme, at the classic $199 price. At first, it looks like Verizon is trying to put a divide between what is essentially last-gen hardware (single-core CPU, WVGA screen) and current-gen hardware (dual-core, qHD), and create a new pricing scheme in the process. But, it is actually placing the line in a less obvious place between CDMA phones with <512 MB of RAM and LTE phones with 1 GB of RAM.

The trouble with this trend is that the reasoning behind the price bumps are a little opaque, and may not be so easily explained to the average user. Since the introduction of the first LTE phones, Verizon has been trying to push up the price of handsets. At first, certain LTE handsets, like the HTC Thunderbolt, were launched at $249, and this seemed like nothing more than a sort of "4G tax". But, this recent bump looks more like an across the board change aimed simply to see whether or not customers are willing to pay more.

The key behind these price bumps looks like the full retail price of the phone. The pattern seems to be that phones with a full retail price of $400-500 get a price tag of $199. This includes the DROID 3 (full retail of $459) and the HTC Rhyme ($439). While phones with full retail prices over $500 get the new $299 price tag, like the DROID Charge (at launch, full retail of $569), DROID Bionic ($589). Of course, the big outlier of this trend is the iPhone. 

Subsidy disparity and the average customer

The Apple iPhone 4 (8GB) which is now selling for $99, still has a full retail price of $549, while the new iPhone 4S (16GB) is selling for the standard $199, but has a full retail price of $649. We've known for a long time that Apple gets much higher carrier subsidies than any other manufacturer, but given the new pricing scheme for Android devices, this benefit seems more unfair than ever before. Granted, the iPhone is a "cultural touchstone", and "one of a kind" and blah blah blah. However you spin it, the end result is still that top-tier Android phones which match or surpass the iPhone in every spec or feature list around are getting $100 less in subsidies. This has the unfortunate side-effect of not only putting those Android devices at a disadvantage, but it makes the iPhone seem like a bargain as a dual-core phone at the mid-tier price of $199.

The majority of consumers still likely don't understand the subtle differences between the top-of-the-line smartphones. We can assume that workers in stores can do a fair job of explaining the difference between iOS and Android. But, what exactly would these workers be saying to justify a $100 premium on the top Android phones? The differences between the DROID 3 and DROID Bionic ultimately fall to two things: the LTE radio and double the RAM of the Bionic. Explaining the difference in speed between LTE and CDMA is an easy task, but explaining the performance difference between 512 MB of RAM and 1 GB of RAM can be tricky, especially in smartphones that are already more powerful than most users care about. And that's something that we want to stress: we know that most of our readers are not the "average". Most of you are a little more fervent about technology, so you will likely not only notice, but have use for that extra power. Average users will notice the difference in browsing speed with LTE, but maybe not much else. 

The danger of the new prices

Aside from consumer confusion over the reasons behind the new pricing scheme, the bigger issue is that Verizon is attempting to derail the update process of manufacturers and create a new norm. The way pricing schemes have traditionally worked is that new devices move in and get the $199 price point, while older phones get a minor price drop to around $149 or $99. With this system, consumers could get last-gen hardware at a slight discount if they didn't want or need the top-notch devices. The new system would put another level in that system with top-tier phones at $299, last-gen phones at $199, and older than that would be lower priced. This means that at the top, consumers will have to pay more for not as much of a performance boost, and those looking for bargain or free phones will be left with worse hardware at the lower levels. 

It also gives the iPhone what could be considered an advantage being placed in the upper middle-tier price range. As we mentioned, it's easy to explain the differences between iOS and Android, but it isn't as easy to describe the real-world difference between a $199 Android and a $299 Android, or why that premium is worth it. However, it's more likely that because of the pricing structure, the iPhone 4S will be lined up as a competitor to the top Android devices like the Bionic even though the iPhone 4S doesn't have the specs that Verizon seems to be setting up for that top tier (LTE and 1 GB of RAM). That leaves the iPhone 4 being compared to devices like the HTC Rhyme on the lower middle-tier. Because Apple doesn't list RAM capacity, that means LTE will be the only real selling point that will be noticeable for average consumers on the Android competitors at the top, and are customers really going to pay an extra $100 for that?

So far, the other major American carriers have not followed Verizon's lead, but if Verizon finds that customers will pay the extra cost, you can be sure that AT&T at least will follow that lead. We may be lucky enough that T-Mobile and Sprint will keep lower prices in order to be more competitive, but it's hard for any company to give up the bigger profits available from offering lower subsidies. If we're lucky, this pricing structure won't last, but it has the potential to set a dangerous precedent in smartphone pricing.

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