A hot new smartphone can be Incredible, Vibrant, Epic or just "eh," but no matter how it stacks up, it's a safe bet that it will start selling at $199.
On the four major wireless networks -- Verizon Wireless (VZ, Fortune 500), AT&T, Sprint (S, Fortune 500) and T-Mobile -- there are 13 smartphones priced at $199 with a two-year contract. There are no phone models with a higher starting price (add-ons like more memory can increase the price tag), and there are more smartphones selling at $199 than at any other single price point.
But spending $199 doesn't guarantee you a top-of-the-line phone. On AT&T's (T, Fortune 500) network, $199 will buy an iPhone 4, the best-selling smartphone of all time. But you'll need to fork over the same amount for a BlackBerry Bold 9700, a nine-month-old phone that lacks a touch screen.
It will also cost you $199 to get an HTC Tilt 2, which runs Windows Mobile 6.5 -- an operating system so out of date that Microsoft (MSFT, Fortune 500) is set to completely abandon it in the next few months.
So what's so special about $199?
"The obvious answer is that $199 is a magic price point for smartphone volume," said George Appling, partner at consulting firm Booz & Co. "The not-so-obvious reason is that carriers are not charging customers what they pay."
In other words, wireless carriers pay significantly more for smartphones than you do. In exchange for your signature on an expensive two-year contract, they'll offer you the smartphone for less than it costs them but as much as they think you'll pay for it -- and right now, that's $199 across the board. Buy an unsubsidized iPhone 4 straight from Apple (AAPL, Fortune 500) and you'll pay $599 for the 16 GB phone that AT&T sells for $199 with a two-year contract.
Smartphones generally cost carriers around $500 per unit. Volume deals and other negotiations with manufacturers can shave down that price tag, but the hotter the phone, the more a carrier will pay to buy it.
But that's just the start of their calculations of what a phone "costs."
Phones that tend to eat up more bandwidth -- hello iPhone! -- add to the carrier's overhead. Put together the upfront cost of the phone and the back-end cost to service it, and you're left with the phone's profit margin. For a model with really tight margins, the carrier might find itself essentially forced to charge more upfront than it otherwise would -- it can't discount the purchase price and still scrape out a profit. That sometimes leads to inferior phones, like the BlackBerry Bold, carrying the same price tag as more advanced rivals, like BlackBerry's Torch.
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