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The End of the High-Margin Mobile-Device Money Machine Is Nigh

Whether looking at Apple's (AAPL) iPhone, Google (GOOG) Android, or even the RIM (RIMM) BlackBerry, smartphones have been good business -- high revenue and margins. Dell (DELL) finally released the Aero, its own Android phone, with an initial price of $99.99 with a two-year AT&T (T) contract.

That's about half of what an iPhone 4 commands with the same commitment. On the surface, the problem is that Dell waited too long and "faster and better" devices were already available. But another dynamic is the inevitable downward march of prices, no matter what companies ship. That's what the Aero really represents: the near term end of most vendors getting the high margins they've come to associate with mobile devices of all sorts.

There has actually long been pressure on mobile device prices. Apple had to drop the original iPhone tag by $200 within two months of its introduction. More importantly, the high priced smartphones depended on sizable carrier subsidies. Although consumers ultimately did pay the full price through the mandatory voice and data plan fees, they perceived a much cheaper initial price. Google tried selling its own branded phone that, aside from other difficulties in the company's retail strategy, had a price well over $500.

Clearly there has been an upward bound all along. The top down pressure has only become more obvious as companies have moved through early adopters willing to shell out significant money to get the products they craved. But mobile electronics are expanding in a horizontal direction, and expecting the original levels of pricing is unrealistic. Retailers cut the price of the new BlackBerry Torch in half a week after its introduction.

There are too many choices to keep consumers paying the same rates they have. There will be a segment of the market that will pay a premium for an iPhone or the hottest Android-running hardware, but that's down to $200. There's a reason: smartphone growth rates of 38 percent in Q1 and almost 57 percent in Q2. Most people aren't willing to put heavy money into a handset, and average prices must continue to tumble if the market is to expand.

This pattern has already traveled beyond the burgeoning smartphone market. Amazon (AMZN) has bragged about the success of its latest Kindle: "already the best selling products on Amazon." What tipped things in its favor? The company recently dropped the price to $139 in response to other relatively inexpensive devices. Guess what? E-reader prices are headed even lower -- $100 and below. That's what it's going to take as tablets that can duplicate the functions and deliver more flood the market. It's another area where Apple's initial stake in the ground, $500, won't hold for long.

It's all part of what has become the natural pricing cycle in high tech. Early products sell at a premium and bring a majority of the margin dollars a vendor will see, according to industry experts I've spoken with over the years. Those who are late to the party are out of luck. It's why vendors rush devices out the door and ship more bugs as a consequence. And all of this is part of how hardware wants to be free. Industry-wide price erosion isn't just for PCs any more.


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