Will low-income buyers reshape the smartphone market?

Smartphone Market Analysis

On August 21st, MetroPCS (PCS) unveiled a notably aggressive $55 unlimited 4G LTE plan. It promises unlimited voice, texting and 4G data for less than half of what a similar plan would cost at AT&T (T) and Verizon (VZ). On August 22nd, T-Mobile unveiled a new unlimited plan starting at $70. A coincidence? Probably not; the budget carriers of America seem to be gearing up for a new assault on the Verizon-AT&T smartphone duopoly. We’ve seen unbelievably cheap smartphone campaigns from budget carriers before and they have never had much success. But this coming winter, demographic trends may finally begin favoring MetroPCS and its ilk.

Chetan Sharma Consulting reported in August that more than half of American mobile subscribers now own a smartphone. A Nielsen survey from last May showed a similar result. According to Nielsen, the proportion of U.S. smartphone owners vaulted to 50% from 18% in just three years.

There are now more than 100 million smartphone subscribers in America. Factor in that children under 12 rarely own an advanced handset and you’ll find that roughly 40% of teens and adults in America own a smartphone.

The top 40% of American households are already in the smartphone camp. Households in the bottom 60% have annual income below $62,000. That amounts to less than $24,000 per household member.

The cheapest new Verizon smartphone plan is $90 after the recent $20 price hike, which adds up to a minimum of $1,080 per year. Consumers in the bottom 60% of U.S. households face the prospect of paying more than 4% of their gross annual income if they opt for an AT&T or Verizon smartphone plan. This would be a lot.

For years, challenger operators like MetroPCS and Leap Wireless (LEAP) have struggled to make any headway in the smartphone business utterly dominated by AT&T and Verizon. The Big Two carriers have skillfully targeted the upper-middle class, convincing affluent consumers that they should pay extra for superior coverage and a classy device selection.

But will that pitch work with lower-income consumers, especially now that AT&T and Verizon are trying to force all new smartphone buyers into expensive plans with unlimited texting and voice? This will be one of the key questions of this coming holiday season.

Smartphones are likely to make up more than 75% of new handset purchases in the fourth quarter of 2012. But this Christmas will be very different from the holiday season in 2009, when little more than 20% of American mobile subscribers owned a smartphone. This Christmas, new smartphone buyers won’t come from $100,000-plus households.

The summer wave of aggressive new price plans from Virgin Mobile, MetroPCS and other challenger operators creates interesting new dynamics in the U.S. smartphone market. Smartphone ownership is snowballing and rolling in low-income households, yet the leading carriers are deliberately discontinuing price plans that suited those buyers.

Second-quarter subscriber numbers from MetroPCS, Leap Wireless and Sprint (S) did not yet show any sign that these budget deals are helping to lure in new customers, but this new round of pricing changes will test the status quo again during the coming quarters.

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