For years, I've been talking about the effects of price pressure on the subsidized smartphone business -- the phenomenon that, when left unchecked, results in too many market segments squeezed into far too narrow of a price range. In turn, that leaves low-end devices priced right out of the market altogether. Of course, smartphones pervade every nook and cranny of your carrier's lineup more completely nowadays than ever before, and I've found that it's leading to some truly strange pricing problems.

That was really driven home for me today when I took a look at the first page of of Android devices on T-Mobile's online store. In the span of just $50, you range all the way from the lowly Comet -- sourced from Huawei with a QVGA display -- up to the relatively powerful, capable, and competent myTouch 4G with HSPA+ and a front-facing cam. Granted, the myTouch is refurbished, but you've still got access to the Optimus T and myTouch 3G for free -- and both of those devices are head and shoulders above the Comet, Charm, CLIQ, or CLIQ XT. Every one of those currently go for $0 on contract. And when you look at the total cost of ownership over the span of a two-year commitment, the difference in cost between a free device and a $50 one is all but meaningless.

It's like your realtor showing you two homes: a one-bedroom shack with a leaky roof for $100,000, or an eight-bedroom mansion with a pool for $110,000, both with the same maintenance costs over time (far-fetched, I know, but stay with me on the analogy). Which would you choose? Even if you had to stretch a little bit, you'd obviously aim for the mansion. And what's especially troubling is that for your average consumer, the difference in quality and capability between a Comet and an Optimus T is far less obvious than the difference between a shack and a mansion at the point of purchase. In fact, I'd argue that the obscurity is the one and only reason devices like the Comet have a market right now.

So far, American carriers seem reluctant to deal with it, but here's the thing: the answer doesn't simply have to be for low-end smartphones to go away. Not everyone needs an iPhone, an Atrix, or a G2x, but it is the responsibility of the carriers to reward their customers appropriately for choosing cheaper devices upfront. That's the place where they're failing. I think there are a couple possible options on the table:

  • Low-end smartphones could be offered with cheaper, exclusive plans. T-Mobile tried this with the Nokia Nuron, which could be activated with a relatively cheap $10 unlimited data plan typically reserved for dumbphones. Over the course of your contract, the benefits really start to add up -- and I bet that carriers' internal stats support my belief that owners of devices like the Comet use significantly less data than owners of midrange and high-end devices (those in the $100 to $300 range). The downside is that there would be a constant barrage of controversial gray areas about what phones should be eligible for the cheaper plans... and plus, as devices get cheaper over time, you'd need to decide whether to make them eligible midstream. Pretty hairy.
  • More creative subsidies. Right now, there seems to be an implicit understanding that the floor is $0 on contract. But why? If the Optimus T is free, I think you can make the argument that the Comet is worth about $-50, so either pay the buyer upfront (say, with a prepaid card) or -- probably the more compelling and manageable option -- offer a bill credit. So, for example, if you buy the Comet, you pay nothing upfront and the first $50 worth of service would be covered. Sprint ran a promotion recently that involved bill credits, so I know for a fact these carriers have the technical capability to manage an option like this.

The bottom line is that the price pressure phenomenon is entirely artificial and ends up short-changing bargain shoppers who deal with an enormous range of quality in the span of a couple $20 bills when they walk into the store. As with any product, you should be able to figure out very quickly how capable a product is by its relative pricing -- and in an age where even $250 is "pushing it" for a high-end model on contract, these guys are going to need to get creative.