Will Consumers Balk at 5G Phone Prices?

Consumers could suffer from sticker shock when it comes time to buy a 5G-enabled phone, suggests a new report from IHS Markit, based on a poll conducted in the United States.

Although consumers expect to pay more money for 5G smartphones, the prices may exceed their expectations dramatically, with some devices selling for as much as 29 times more than what the average buyer might anticipate, the research firm noted.

Ninety-one percent of the survey respondents said they would expect to pay more for 5G devices, but three quarters of those individuals expected that amount to be just 10-25 percent more than a 4G handset.

Consumers may be disappointed when they see that the some phones are far more expensive, IHS warned. For example, Samsung's S10 5G phone has a retail price of US$1,300 -- a 335 percent premium when compared to the $388 price of a Samsung 4G device.

5G Adoption

Early adopters tend to understand that having the latest and greatest products requires paying a premium, and some consumers are willing to open their wallets.

"Samsung has reported some solid initial sales of Galaxy S10 5G, especially in South Korea, suggesting the high price tag of these devices will not hold back everyone," said IHS Markit analyst Joshua Builta, author of the recent report.

"Early adopters in particular are likely willing to pay a premium to be on the cutting edge," he told TechNewsWorld.

Yet, the extreme pricing could impact mass market adoption.

"As our survey indicates, these price points are far higher than what consumers are expecting to pay to glean the benefits of 5G technology," added Builta. "This suggests there is pressure on the handset OEMs to get this pricing down in the next six to 12 months, especially since many are counting on the release of 5G devices to boost their struggling smartphone sales."

A Higher Top

With many consumer electronics, the manufacturers often are forced into a "race to the bottom" with the goal of making the product as affordable as possible. This has been notable with TVs. Sets are now at the cheapest level ever when adjusted for inflation, which is not a maintainable business model.

Thus it may be necessary to start the pricing much higher with some new products, as the manufacturers will know that supply is limited and the demand will be great enough.

"The initial price of 5G phones is not indicative of anything except manufacturers starting at the top of the marginal price curve and getting ready for a quick downhill run," explained Steve Blum, principal analyst at Tellus Venture Associates.

"As manufacturing ramps up and product bugs are squashed, the price will come down," he told TechNewsWorld.

"The first target market is technophiles -- people who will buy it because it's new tech -- and that's probably a six-figure market in the U.S. so they'll pay the most," Blum said.

"The second target market is early adopters -- people who perceive a significant benefit from the increased performance 5G phones presumably will offer," he noted. "That market is probably in the seven-figure range. By the time 5G phones break out into the general market -- eight and nine figures -- price points will be in familiar, 4G territory."

Familiar Pattern

Consumers hoping for a deal may be disappointed, but those familiar with product life cycles likely will take the pricey 5G phone debuts in stride.

"It should be noted we believe this initial high pricing is not unusual -- we saw the same thing with the first LTE phones," said IHS Markit's Builta.

"Based on this history and upcoming release of designs employing multimode mode modems, we do expect 5G phone pricing is to decline over the next year," he added.

There are other factors that could come into play as well.

"In recent years the price of smartphones has been rising, and it has nothing to do with 5G," said telecommunications industry analyst Jeff Kagan.

"Today Apple iPhone and Google Android [phones] like Samsung Galaxy are so high they are pricing themselves out of the marketplace with many users," he told TechNewsWorld. "The reason for this price increase is related to the fact that smartphone sales have decreased, and the companies need to keep their stock price high."

One way to hang onto profitability is to raise prices even if there isn't innovation.

"The problem is, these higher prices are tone deaf -- users don't want higher prices without innovation and are pushing back," said Kagan.

Chicken-and-Egg Scenario

What could present another problem is the fact that the 5G networks have just begun rolling out, so in many cases the devices will rely on existing 4G infrastructures.

"Hardware and service adoption will follow service availability, and that will be the limiting factor in 5G uptake over the next two to three years," said Blum.

"There's very little 5G service available right now, and commercial-scale deployments won't begin until next year," he added. "What we're seeing now is pilot projects aimed at preparing for the buildout that'll begin in 2020 and continue for the next five to 10 years."

As a result, there's no need for manufacturers to rush into 5G production or push down phone prices right now.

"They're wisely positioning themselves for the long haul," Blum suggested.

That may not work to the advantage of consumers, though.

"By the time 5G is the standard, we will be used to the new level of smartphone prices -- and by that time, if we're used to the higher prices, I don't know if they will ever come down again," said Kagan.

The Network Connection

As for the other half of the "chicken and egg" dilemma, it comes down to whether the higher prices could slow adoption of the devices, which then could lead the carriers to slow their 5G rollouts.

Though that is a possibility, it's a highly unlikely one. It's more likely the carriers will forge ahead. That actually could be a good thing, because the rollout of 5G will take time.

"Even in the U.S., which is at the forefront of deployments, 5G is limited to a handful of markets," Builta noted.

"If you're outside one of these select markets, in a rural location or on a highway, your phone will be falling back to 4G," he added. "Consumers could be reluctant to pay the 5G premium if they are not enjoying its benefits most of the time."

What Consumers Actually Pay

There is also the issue that few consumers actually pay the sticker price. Unlike TV sets or other consumer electronics, mobile phones often are subsidized by the carriers to keep consumers locked into extended contracts.

"We have to look at what the customer actually pays rather than the full sticker prices that almost nobody pays in the United States," noted Roger Entner, principal analyst at Recon Analytics.

"The 5G phones come in at roughly (US)$40 to $50 per month when they get financed," he told TechNewsWorld.

That still could result in a hefty monthly bill, however.

"Either way, we are getting in the painful area, because it basically doubles the monthly cost of having a mobile phone," Entner said.

"Now we all have to ask ourselves, when does the consumer reach the point where they don't want and can't afford a new phone?" he pondered. "The answer is twofold: Yes, consumers are buying new phones at prices many people think are very expensive -- but they are buying them less often."

Slow March on the Road Ahead

Right now consumer awareness of 5G is far lower than expected. Only a little more than 50 percent of consumers in the IHS Markit survey were even aware of the 5G rollout, and many said they were unsure how the technology would benefit them.

"Ultimately, lower device pricing, greater network availability, and increased consumer awareness of the technology will need to come together before we see 5G smartphone growth accelerate," said Builta.

"5G is still in its infancy, and operators certainly recognize that 5G networks and devices are still very limited," he added.

It is important to note that 5G is about much more than smartphones, however, so even if consumer adoption of handsets is slow, the technology will have uses with autonomous vehicles, Internet delivery of video, and other services to numerous devices -- and it won't be limited to the United States.

"Other exciting use cases for the technology include massive Internet of Things and mission-critical applications, which will enable [things like] autonomous driving and remote surgery," said Builta.

"These use cases will require ubiquitous networks, and will fuel continued 5G buildouts in the years to come," he pointed out. "China will be critical too, as it has some very aggressive 5G targets which could drive up 5G handset volumes, which in turn will drive down pricing for the entire ecosystem."