Fierce Wireless had an interesting article about Verizon that I got a chance to read yesterday.  In the article, they note that Verizon has dropped the price on almost all of their smartphones to $99 or less with a 2 year agreement.  The speculation in the article is they are doing this to clean out their inventory in preparation for offering new devices that will be coming soon.  While I think there is validity to this claim, I think there is more to it than that.

After all, Verizon has been offering good deals on BlackBerry devices for several months with their buy one, get one free offer.  So why would they be doing this?  After all, each device they sell generally costs them more than what you pay for it.  Surprised? What many people don’t realize is that carriers like Verizon pay the manufacturer of the smartphone more than what consumers pay for the device.  They subsidize your purchase.  The iPhone was just about the only exception to this rule when it was first released.  If you recall, early purchasers of the iPhone payed $599 or $699 for the coolest smartphone on the market.  But later on, AT&T began to subsidize the price of the iPhone, and pricing to the end user dropped to $199.

Why do carriers do this?  It’s simple really, and it’s a model we are all accustomed to.  It’s all about razors and razor blades.  The maker of razor blades sell you the razor very cheaply, because they know you will buy blade refills and that is where they make their money.  It’s the same with carriers.  They subsidize the price of the phone so you have a lower entry price.  After all, on average people spend $50-$60 per month for each wireless phone.  The industry calls that ARPU (Average Revenue Per User), and it is one of a few numbers they watch very closely.  If they can make it easy for you to buy a new phone cheaply, they know you will sign up for 2 years at a run rate of $60 or so per month.  Not a bad model.

So, if you apply this same model to smartphones, you can see why it would make sense to lower prices on smartphones to get you to move to a smartphone.  It is also interesting to note that ARPU for smartphones is higher than for regular phones.  Carriers want and need us to consume more data plans, and smartphones provide a reason for us all to use more data, and not just voice.

If this whole idea sits wrong with you, like you are being tricked into something, it shouldn’t.  The more of us that use smartphones and data plans, the cheaper they become.  It’s like LCD displays.  When they originally were introduced on laptops, they were very expensive.  But as they produced more and more laptops, they refined the process and LCD displays became cheaper.  Now they are found everywhere including cell phones, GPS units, car stereos, TV’s, and the list goes on and on.  So in the long run, cheaper smartphones means more users of data services, and that means more powerful devices and more comprehensive data services for all of us.  And that’s a good thing.