The Evolution of Smartphone Pricing

Smartphones are so ubiquitous that’s it’s easy to forget that the first iPhone was announced in June 2007 and released to the public later that year. The Apple App store at the time of the first phone had only 500 apps, most for pay. Apple had convinced developers that smartphone users would pay big bucks to download useful apps and most app prices ranged from $1 to $25. It became clear that users preferred free apps, and Ebay and other free applications found great success. But some for-pay apps like Super Monkey Ball, priced at $6 found good commercial success.

The cellphone companies at the time had mostly deployed 3G networks. The cellular companies saw the smartphone as a way to lure new customers and they all offered unlimited data plans. Unlimited plans were not a problem at first because the average phone didn’t use much data. However, the smartphone boom surprised everybody with Apple selling 4.7 million iPhones in the third quarter of 2008 – and sales skyrocketed from there. Android phones also entered the market in 2008 and the 3G cellular networks were quickly getting swamped. The cellular carriers quickly stopped selling unlimited data plans and tried to lure people from existing plans through practices like the way that AT&T slowed data speeds on unlimited plans.

About this same time was the introduction of 4G, which offered faster speeds and could connect more customers per cell site. The cellular companies had migrated entirely to metered pricing and sold data by the gigabyte. The market was clearly trying to extract as much revenue from customers as possible like they had done in the past with products like text messaging. The few cellular carriers were effectively monopolies who were selling a product with great demand, and prices steadily rose.

For many years there was enough capacity on the cellular networks to have supported unlimited and larger data plans. I remember a few unguarded comments by cellular executives admitting that they had plenty of network capacity – but the cellular companies cared more about profits than in accommodating the needs of customers. I remember years when both AT&T and Verizon were earning cellular profits of more than $1 billion per month.

T-Mobile upset the market equilibrium by offering cheaper data. They did this by offering more gigabytes of data for the existing market price and the other cellular providers responded by dropping the price per gigabyte. jumped on the bandwagon. We started seeing plans that promised gimmicks like rolling over unused data so that customers didn’t have to fear exceeding their data caps.

During this time we started seeing big customer volumes for MVNOs – carriers that repackaged wholesale minutes from the big cellular companies. The MVNOs offered options numerous options that lowered prices, such as low-price plans for small data users or large packages of data plans for the larger data users. All of this was aided by the continued evolution of the 4G networks that improved steadily as more of the 4G specification was introduced – we finally saw the first fully 4G compliant cellular sites at the end of 2017.

In early 2017 we sy another sharp turn in market pricing when all of the carriers announced ‘unlimited’ data plans. This was largely in response to T-Mobile which had launched ‘T-Mobile One’, a truly unlimited plan. The unlimited data plans from other carriers weren’t actually unlimited and most were capped at a little over 20 gigabytes of data per month. This seems to have created the expectation from the public for large data plans.

Already since then the cellular carriers have subtly shifted the game again. They now offer multiple tiers of unlimited data. For instance, customers can buy unlimited plans that charge more to add on HD video. Customers can buy plan that add international roaming or plans that throttle usage when customers hit a certain cap. The multiple-plan approach looks to be a way for the carriers to extract more revenue from a product that they fear is becoming a commodity. They are offering add-ons that they hope will lure customers to spend more each month.

It’s hard to believe that all of this has happened within only eleven years. There must be grist here for dozens of economics PhD thesis papers looking at how an oligopoly market responded to major technical improvements and massively increased demand. There is no arguing that the cellular carriers have been successful and have convinced each person in a household to buy cellular plans that cost more than what most families spend on telephone services a decade ago.

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