How Much Should Smartphones Cost?

While writing about the Sprint Instinct HD today, I was kind of shocked that they were going to charge $250 for it after rebates and a new two-year contract. In the world of a $199 iPhone, and a $149 Palm Pre, I just don't see why anyone would want the less-capable Instinct HD. It points to an interesting pricing trend that is going to be a larger issue in the smartphone world over the next few years.Apple's iPhone didn't really hit the mainstream until the 3G version hit the magical $199 price point. This has essentially become the price barometer by which consumers measure other smartphones against. It makes sense too, because it's tough to fathom paying more than that for a device that will likely not offer the same functionality as Apple's device. Since the $200 price point came about, we've seen high-profile handsets like the Palm Pre, T-Mobile G1, and the latest BlackBerry smartphones come out at less than $199.

But in order to get the iPhone at that entry point, AT&T has to shell out nearly $400 in subsidies, and there's some concern that this could eat into their margins. AT&T is not alone at this, as the other carriers have to shell out a few hundred dollars to get top-tier handsets at affordable prices, but AT&T is especially hit by this because Apple seems determined to roll out a new model each year and high percentage of iPhone users feel they need to upgrade. The subsidies were a major reason why AT&T initially didn't offer iPhone 3G customers a discount on the iPhone 3GS, although they later changed their upgrade policy.

Of course, the carriers don't mind shelling out a few hundred initially to get you to have that $30 data plan for two years, and the iPhone accounted for the majority of AT&T's new subscriber growth last quarter. But, there is a limit to subsidy dollars - this is clearly evident with the pricing of the Instinct HD and T-Mobile's and Sprint's versions of the HTC Touch Pro 2, which will come in at a whopping $350. It's tough too, because the price to make these devices remain relatively stable. Even though components are getting cheaper, handset makers do have to shell out more for design, software developers, and marketing.

But I think this issue will lead to a growing market of lower-cost devices that still have high-end features. Someone like INQ Mobile could come in with their upcoming Android devices and offer devices that are affordable to end-users without much subsidies. Android could be a key to these lower-priced devices because there are rumors that the Motorola Cliq could come out at a very low price on a new contract.