Cheap smartphones set to boom in the pre-paid market

Support for social-networking applications is the main draw for users to purchase a smartphone

Smartphones are set to become much cheaper as mobile phone vendors try to get data-centric devices in the hands of pre-paid subscribers.

Smartphones are often thought of as very high-end and expensive devices that sit at the top of vendor portfolios, according to Geoff Blaber, analyst at CCS Insight. In reality that is starting to change, with vendors putting out more devices at much lower prices, he said.

Currently, products based on proprietary operating systems are leading the way. Devices like the QWERTY keyboard equipped KS360 from LG and phones upstart INQ Mobile have put smartphones into the mass market with price tags below EUR130 ($US180), and that segment is expected to grow significantly, according to Blaber.

But increasingly smartphones based on open operating systems -- including Android and Symbian -- are also coming down in price. "A good example of that is the Nokia 5530, which was launched earlier on in the year," said Blaber.

The Nokia 5530 XpressMusic device costs EUR199 before taxes and subsidies, and just started shipping in, for example, Europe and China.

But even cheaper phones are on the way. By the end of the year, in time for the holiday shopping season, prices will have come down to EUR150, according to Ben Wood, at CCS Insight. Models at that price range will still be fairly few and far between, but during next year they will become commonplace, he said.

The vendors also see prices eroding further. Chip maker Qualcomm has predicted that prices for smartphones will drop to $US150 during next year, according to Wood. Samsung Electronics is even more aggressive in its predictions; last week it hinted that consumers will see Android-based phones for less than $US100 during next year, according to The New York Times.

The Asian vendors are going to use this shift in the market to get a foot in the door. ZTE and Huawei Technologies will launch smartphones priced between EUR100 and EUR150, which most likely will be branded by operators, according to Francisco Jeronimo, research manager at IDC.

Motorola may also play a role in getting the ball rolling on cheaper Android phones. The company is putting a lot of faith in its upcoming roster of smartphones, and operators could put pressure on Motorola to keep costs down if it wants them to carry the phones, said Carolina Milanesi, research director at Gartner.

Android will also open the door for new vendors, and that is going to drive a lot of price competition in 2010. "Look at companies like Acer. It has made a business of driving the cost down in the PC industry, and made money out of very tight margins, and I think their strategy is going to be much the same in mobile," said Blaber.

The Google mobile platform is getting most of attention these days, but Symbian is equally suited, if not even more so, for putting out low-cost smartphones, according to Blaber.

These low-cost devices will target the pre-paid market segment, which in Europe includes more than 60 percent of subscribers. The lack of subsidies in this segment makes the current crop of high-end smartphones too expensive for a huge number of users, according to Blaber. When the value of the contract isn't part of the equation, paying out subsidies makes little economic sense for the operators, he said.

But there is no such thing as a free smartphone, and users who pick one of these lower-priced devices won't get the latest and greatest in hardware. For example, the Nokia 5530 does come with a 2.9-inch widescreen display and has a Wi-Fi connection, but the camera is only 3.2-megapixels and it lacks 3G and GPS support. But that is what it takes to get the prices to come down, and that is key if smartphone use is to increase among consumers, said Jeronimo.

The main attraction will instead be more integrated support for social networking. The Nokia 5530 user interface includes what Nokia calls a "people carousel." It provides access to up to 20 contacts -- which are represented using thumbnail images -- and their social media updates, e-mails and phone calls. The INQ Chat 3G and Mini 3G contain a Twitter client that will always be on after the initial log-in. Consumers can then send Twitter messages, and updates are delivered straight to the homescreen.

"Social networking will be the main driver for data services for a long time, and it doesn't matter whether if it's in pre-paid or post-paid," said Blaber. Jeronimo added: "There is a strong interest from end users, and that is one of the biggest reasons why some consumers are replacing their devices for smartphones," he said.

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