The Decline of the Mid-Market Cell Phone

(page 2 of 2)

While free mobile operating systems save just a small amount on a per unit basis, they have a more substantial effect on lowering internal development costs. "If companies adopt free software, it will save them some headaches. They can put their developing efforts into other areas," says Teng. "When software is free, companies can concentrate on what software they should incorporate into their devices to differentiate themselves to the consumers."

A rise in low-end users and a drop in mid-level users could radically alter revenues for some companies. "The volumes from developing markets will be immense in years to come, but the revenue will be miniscule," says ABI's Burden. "It could be 40% of the market in five years [in units], but it’s going to generate less than 10% of the revenues." Burden expects most major handset manufactures to change their product development in anticipation of these changes, but he cautions there could be trouble for companies that don't adapt. "They need to evolve their product portfolios," he says.

Getting smarter

Nokia is already gearing up. The Finnish company, which is the largest maker of mobile phones in the world, is busily developing phones to meet both high- and low-end demand. Its most advanced phones let people play music, take videos, manage their e-mail, and navigate through foreign cities with street-by-street guides. "Ten years ago, people used mobiles for voice," says Bill Plummer, vice-president at Nokia Americas. "Today they use them for any passion."

Not everyone believes in the decline of the mid-market cell phone. Japan’s Kyocera (KYO), for example, plans to continue targeting customers looking for mid-tier phones at the same time it offers more affordable cell phones. John Chier, director of corporate communications, says the company was an early entrant into the smartphone market, but shifted its focus to the faster-growing mid-tier market several years ago. While declining to specify Kyocera’s future business strategy, he says there’s a natural evolution in the market as the features of smartphones become common in midrange phones, and the lower prices on such phones attract a broader group of customers.

Verizon Wireless is also taking a nuanced approach. The company, a joint venture between Verizon Communications (VZ) and Vodafone (VOD), plans to offer its customers plenty of high-end smartphones, but it will also let them choose phones with fewer features—and lower price tags. "Customers will have many choices," says Wanda Newman, marketing manager at Verizon Wireless.

Still, once people have the experience of holding a small device in their hand with all the capabilities of a computer, it’s tough to accept something less. Brooke Hunter says she’s hooked on the Motorola smartphone that lets her zip off e-mails whenever she has a spare moment on the train. "I’m used to typing on the keyboard," she says. "I would never go back to a flip phone."

Yarow is a reporter for BusinessWeek.