Finding the connected consumer’s new loss leader

The quickly shifting roles of devices and services has some of the best minds of the tech world struggling to figure out which are the razors and which are the blades of the connected consumer economy.

In an interview this week, Google CEO Eric Schmidt said, “The iPhone has proven that you can sell a phone with a subscription. The contract cost is greater than the cost of the phone. So what do you think: Do those prices remain higher from AT&T and those guys? Does the hardware become free?”

Malcolm Gladwell, author of The Tipping Point, posed a similar question recently: “Apple may soon make more money selling iPhone downloads than it does from the iPhone itself,” he wrote. “The company could one day give away the iPhone to boost downloads; it could give away the downloads to boost iPhone sales; or it could continue to do what it does now, and charge for both. Who knows?”

For carriers, one thing has become clear, according to analysts at the Yankee Group: Subsidizing consumer devices in order to snare subscribers is no longer the great idea it once was. In a new report this week, Yankee Group analyst Andy Castonguay urged operators to eliminate (or at least reduce their dependency on) device subsidies in order to lower customer acquisition costs. Easing those costs will allow operators to be more flexible with contract length and service prices, he said.

Another report this week, from Yankee analyst Joshua Holbrook, suggests that subsidizing netbooks might not be a good bet either, but for different reasons. “An exorbitantly high return rate for netbooks…demonstrates that consumers don’t understand the limitations of netbook functionality,” Holbrook writes, warning operators that consumers might confuse “poor netbook performance with poor network performance, thereby severely deflating the value of a wireless operator’s brand and compromising plans to be the go-to locale for the connected consumer.”

Device subsidies were once a great way for service providers to drive market growth, Castonguay said, but the winds have changed, and subscriber growth shouldn’t be the priority it once was. According to data from CTIA this week, Americans now own some 40 million smartphones and connected PDAs and more than 10 million laptops, netbooks and aircards.

“The current state of the mobile market demands a swift change of direction,” he wrote.

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