Who Will Win the Coming Mobile Price War?

According to new research, growth in device sales will be driven more by price, and less by features.

Jan 6, 2014 at 4:00PM

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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Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, Gartner, and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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