Xperia Will Be Pricey IPhone Challenger

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Sony Ericsson's Xperia X1 will go on sale in the U.S. the day after Thanksgiving, but at US$800 the touch-screen phone may be a tough sell, particularly because it will most likely be used on AT&T's network, the exclusive distributor of the popular and far less-expensive iPhone.

The Windows Mobile phone comes with the high price tag in part because it will be unlocked, which in theory gives buyers the freedom to use it on the carrier network of their choice and without signing a multiyear subscription.

However, in this case, buyers are unlikely to use the phone on any network but AT&T's. That's because the phone runs on GSM (Global System for Mobile Communications), making AT&T and T-Mobile the only options in the U.S. In addition, it does not include the capability to run on the wireless frequencies that T-Mobile's 3G network uses. The phone could run on T-Mobile's slower data network, but many of the data-centric features of the phone would be unusable or at least unsatisfying.

AT&T customers will likely compare the Xperia to Apple's iPhone, which is $600 less expensive: With a two-year contract, the iPhone 3G costs $199. Users ultimately pay for the subsidy through their two-year contracts, but most people are sensitive to the upfront price tag of phones.

In the U.S., phone makers seldom try to sell their phones without a partnership with an operator. Mobile operators subsidize phones, typically in exchange for a multiyear subscription, making the end price of the phone far less expensive. In addition, operators invest heavily in advertising the products. For example, Sprint recently spent $100 million advertising the Samsung Instinct, said Avi Greengart, an analyst with Current Analysis.

In addition, operators will sell the phones from their stores, and each of the national operators has thousands of retail outlets. "If you bypass [an operator agreement], you're not only giving up the subsidy but the ads and the retail distribution, so it becomes very difficult to compete," Greengart said.

There are some benefits for manufacturers to selling a phone without a carrier deal. "When going through third-party retail channels, there are no demands saying 'use my music service' or 'put this button here,'" Greengart noted. Operators often require handset makers to change their products in exchange for their marketing backing.

Unlocked phones also may appeal to users who don't want to sign a contract or are "device junkies," Greengart said. But those people won't make up for the volumes that could be reached through an operator. "If you want to sell a million phones in this country, you can't do it through independent channels," Greengart said.

Nokia also tried to essentially exclusively sell unlocked phones in the U.S., and in the process lost significant market share. It recently changed course and has begun trying to work with operators, Greengart said.

At the same time Nokia, perhaps due to its size, has managed to produce low-cost smartphones. On Wednesday, it introduced the E63, a smartphone that will cost $250 before subsidies. Operator subsidies could mean the phone will sell to end-users for very cheap. Such lower-priced smartphones, as well as other less-expensive Windows Mobile phones already on the market, could prove challenging for Sony Ericsson's Xperia.

Sony Ericsson may yet be negotiating with AT&T to sell the Xperia, but may not have wanted to miss the end-of-the-year shopping season in the meantime. AT&T has often historically backed products after they first hit the market, Greengart said.

AT&T did not comment on whether it has considered the Xperia and said it does not discuss future product plans.

T-Mobile, which did not immediately reply to a request for comment, most likely has already said it doesn't care to sell the phone. At one point, designs for the phone included the capability to run on T-Mobile's 3G network, Greengart said. "The decision to pull that indicates to me that T-Mobile is unlikely to pick it up," he said.

The Xperia has gotten generally good reviews and will likely appeal more to business users than consumers because it runs Windows Mobile.

The Xperia is not the only expensive unlocked phone to hit the market recently. The Palm Treo Pro is retailing unlocked for $550. At the time that phone was announced, Bill Hughes, an analyst at In-Stat, said that enterprises can potentially negotiate better deals with mobile operators when they buy unlocked phones. The phones can also allow enterprises to more easily switch operators, if they can find a better rate on minutes.

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