Competition Begins To Drive Down iPhone Prices [Update]

Last Updated Jan 11, 2011 7:00 AM EST

There are forces about to make Android phones incredibly cheap. But the commoditization of smartphones is not an issue for Google (GOOG) alone. AT&T (T) cut the price of the iPhone 3Gs to $49 from the previous $99.

The move is logical and helps explain why prices of Apple (AAPL) phones will in general begin to drop. Not because Steve Jobs has rethought having a premium brand, but because retailers won't be able to afford to hold the line.

[Update: Apple has also dropped the 3Gs price to $49 with a two-year contract.]

AT&T under pressure
Pressure on AT&T is enormous as its U.S. monopoly on the iPhone is about to end thanks to Verizon (VZ). AT&T's hold on a highly coveted device has been a driver of its growth. How large a driver is yet to be seen. It's not as though it will lose the ability to sell the iPhone, and carriers have such tricks as multi-year contracts and early termination fees to help keep customers close.

However, AT&T has had its network problems, with many users complaining about the service quality. In its marketing, Verizon has previously attacked AT&T's service and is also promoting its new LTE high bandwidth wireless network. So AT&T needs to secure not only existing customers, but continue the acquisition of new ones to fuel its growth.

That is why it has started with the $49 3Gs price. Although some see this as an Apple response to the quick growth of Android, I don't think that is the case. Will Apple adjust pricing when necessary? Absolutely. But the company is one of the most clever when it comes to using price as a way to support its premium product positioning and to maintain high profitability.

Price promotions = market-share maintenance
No, this smacks more of AT&T using a price promotion to attempt to keep market share. You can expect Verizon to meet this price, because it cannot afford to be significantly undersold. The carrier pricing strategies will also take into account Android's popularity and the likelihood of plummeting prices later this year for handsets using Google's operating system.

Pressure on carries won't immediately reach Apple. AT&T and Verizon have both shown that they are ready to sacrifice some up-front money for smartphone purchases to obtain monthly service revenues. Eventually, they will push for lower prices from Apple -- not just on the 3Gs, but on the iPhone 4 and any newer model.

Even though Apple has a lot of power, it doesn't have unlimited sway over the carriers. Ultimately, Apple needs them to carry the iPhone. Furthermore, there is that problem of a constantly improving Android on handsets that become ever cheaper. Apple will need its prices to come down to avoid becoming too much of a high-end niche product. Eventually this will begin to take a toll on its margins, as it won't get the same level of subsidy as it could for an exclusive deal.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.