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Who Will Win the Coming Mobile Price War?

Total spending on information technology (IT) devices last year declined by 1.2%, to $669 billion, according to new data from research firm Gartner. It should be noted that Gartner includes PCs in its devices category, alongside what it calls "ultramobiles" like tablets, and presumably phablets, along with smartphones.

However, the flat to slightly declining trend in device sales will turn around this year, Gartner said, with an expected jump of 4.3%. Part of the improvement in overall device revenues in 2014 can be attributed to a growth in tablet sales: A market that should ship as many units as PCs this year, per a report from Canalys. But there's another trend that will account for a significant part of improved device spending this year, and it will impact several companies.

The trend in mobile
In addition to Canalys' prediction of a continued trend toward tablets and mobile computers, Gartner suggests that 2014 will see the continued "convergence" of segments, as devices become more similar in features and performance. The phablet craze, with its larger screen size, mobile computing, and smartphone-like functions, is an example of blurring the device lines.

Phablets made up a whopping 21% of all smartphones sold in 2013's third quarter, and that shift is likely to continue, particularly in the fast-growing Asia market. Phablets support Gartner's latest research because what's driving phablet growth in Asia is exactly what Gartner believes will spur the 4.3% improvement in overall device sales this year: price.

As I mentioned in a recent article, the introduction of Nokia's (NYSE: NOK  ) low-end Lumia 1320 phablet in China could prove to be a boon for Microsoft (NASDAQ: MSFT  ) when it finally assumes control of Nokia's devices and services unit. Again, the reason is the price-sensitive Chinese consumers. Others in the Asia-Pacific region are of the same ilk: They want mobile computing alternatives that won't break the bank.

And the winner is...
The Nokia-Microsoft Lumia 1320 is an example of what consumers are interested in, but according to Gartner, there's more in store than offering low-end mobile devices as 2014 unfolds. Pricing pressure on high-end devices is where the real impact of the aforementioned convergence of segments will come into play. In fact, it's already begun.

When Google (NASDAQ: GOOGL  ) cut the price of its unbundled (no contract needed) high-end, 16 GB (gigabyte) Moto X smartphone from $550 to $399 last week, some investors may have jumped to the conclusion it must not have been selling well. At least, that's often the initial reaction when a device maker slashes prices.

But Google's price cut wasn't a knee-jerk reaction, it's a permanent change and an obvious attempt to put pressure on industry-leading Apple (NASDAQ: AAPL  ) and Samsung. By comparison, Apple's new 5s flagship smartphone goes for $650 unbundled, while Samsung's Galaxy S4 runs $600 without a contract.

The winners in a low-price mobile environment will be those that can absorb the thinner margins that it inevitably causes. As it stands, Apple and Samsung may not dominate the mobile operating system market, but the two combined own all the profits. But here's the crux: One reason Apple's share price remains depressed is concern surrounding its shrinking margins, even with all of those profits. So, what happens when the "erosion of margins," as Gartner describes it, unfolds in 2014 because of pricing pressure?

Final Foolish thoughts
There will always be a place for low-end mobile devices, that's why Nokia, with all of its problems selling smartphones, is still the second largest seller of phones in the world, and why Google unveiled its Moto G. But even the Moto G costs less than comparable units, which is right in line with Google's plan to undercut industry prices.

As the lines between mobile device features and performance becomes cloudier, both Google and Microsoft can operate on razor-thin margins. They can do so because Android and Windows Phone don't need to generate revenue directly to still be successful. Both OSes can, and do, drive ancillary revenues. In the case of Google, ridiculously high revenues. Let the mobile device pricing war begin; Google and Microsoft are ready.

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Comments from our Foolish Readers

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  • Report this Comment On January 06, 2014, at 4:56 PM, twolf2919 wrote:

    Google may be ready for price pressures on mobile due to its ever profitable search/ad cash cow, but is Microsoft? Seems to me, both its Windows (declining PC sales) and Office (increase use of mobile means more alternatives for customers) cash cows are under severe pressure themselves! Microsoft might be able to bleed money on its phones for awhile - but not forever, as Google can.

    As far as Apple is concerned, it, too, has cash cows that would help it with margin squeezes - e.g. its 90% profit margin on ever increasing app and other content sales. But I don't buy the premise that it will feel a margin squeeze in 2014. Apple's phones and Samsung's high-end devices are not really the same animal. When Apple sells you a phone or tablet, it sells you not only the device but also access to its entire ecosystem. What does Samsung have to offer other than the device? Nothing really - there are all the Google services, of course. But Apple users have access to that as well. Therefore, Samsung customers are much more likely to stray to the increasing number of cheaper yet capable phones. Most Apple customers - especially if they already make use of multiple devices and/or Apple ecosystem services - would not want to go back to wallowing in the mud that is the competition.

  • Report this Comment On January 06, 2014, at 5:38 PM, emilykulish wrote:

    >>> twolf2919

    Microsoft is much more diversified than you thought.

    They are the second in cloud infrastructure service next to Amazon and is closing the gap; Windows server owns about 50% of server market share; Exchange server dominates enterprise email and messaging service. In fact, their Servers and Tools group is larger than Windows group.

    Google's 90% of revenue comes from Ad Words. Microsoft generated more revenue than Google from Android by collecting patent royalties. Android OEMs have to pay Microsoft $5-$10 per unit. Now Microsoft owns Nokia, so it does not have the same royalty cost. When you compare any Android device manufacturers with Microsoft's cash cow, the Android device manufacturers are pathetic.

  • Report this Comment On January 06, 2014, at 6:13 PM, JaredPorter wrote:

    Telco carriers (even China Mobile) help subsidize and disguise the initial, true cost of the iPhone in return for getting a STEADY STREAM of monthly contract revenues in order to aid the financing costs of expanding their infrastructure. This "job that the iPhone insures" will keep Apple's margins pretty steady and lofty.

    Also gross revenues from the App Store are running over $1 billion per month and growing! Apple grosses 30% of this and as the base grows, the incremental cost to run this service should shrink. Samsung doesn't have this associated type of benefit of course.

    If Apple can raise its user base to 1 billion users. It's SCALE alone will insure iOS's "first choice among top developers" position indefinitely and Android's base will contract. Everyone has seen the statistics as to how much more valuable and profitable IOS users tend to be.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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