Friday, June 5, 2015 [Tweets] [Favorites]

The Beginning of the End for Smartphone Subsidies?

Dan Moren:

Can’t happen soon enough, in my opinion. Yes, most people don’t want to pay $600-$700 for a brand new smartphone when they could be paying $200-$300—remember the original iPhone?—but the true costs have always been hidden. Your subsidy is built into your phone plan, but even after you’ve finished the usual two-year contract, at which point your phone should be paid off, your bill doesn’t go down. Madness.

I think this is one of the biggest potential threats to Apple’s iPhone sales. With subsidies, if you don’t upgrade your phone every two years you’re leaving money on the table. And it’s only $200 or so to get a new phone. But how many people would upgrade every two years if they actually had to pay the full price? And with hardware improvements that are more incremental than in the early years?

13 Comments

I get what you're saying, but empirically, the iPhone does OK in countries that are no longer dominated by 90s-style post-paid contracts and subsidies.

When the US and Canada finally make this transition and catch up with the rest of the world, the evidence is therefore that iPhone will still do OK.

But in any case, if North America were somehow a special market that responded unlike other countries to this change, you should remember that North America is no longer the iPhone's biggest market. The amount of damage to Apple's global bottom line that could be done by harmful changes is shrinking.

@Mike Good point about the other markets. I think iPhone will continue to do well but that the upgrade cycle will lengthen.

"the iPhone does OK in countries that are no longer dominated by 90s-style post-paid contracts and subsidies."

It would be interesting to see sales per capita in other wealthy countries versus North America. I think NA sales really are helped in a substantial way by the subsidies. I think the majority of folks in NA honestly doesn't have the slightest clue how much they're paying for expensive phones, especially when considering upgrades.

I'd strongly guess it will hurt in NA, to a non-negligible degree.

"Good point about the other markets."

Yup. Very good point indeed. Overseas definitely softens the blow.

Though in a more long-term way, the US market really has oversized impact in a product's worldwide ecosystem. If Apple insists on maintaining margins, and thus gets squeezed in the US market despite no change overseas, it would potentially injure the platform.

iPhone is selling quite good here in Sweden even though we don't have the same model of subsidies as the US. We either pay full price or use the same model as T-Mobile, an installment cost clearly separated from the cost of the plan.

As for the longer cycles of upgrades; I think that is inevitable anyway. The improvements of smartphones have been huge year-over-year but I think they are reaching a point where they are so good that they last longer now and the improvements become smaller. When I bought the iPhone 6 it was mostly for the improved camera and Touch ID, because otherwise my iPhone 5 did not feel sluggish or outdated. That was the first time I felt like that for a two years old iPhone.

In Oz (or at least for me), when you buy a subsidised phone on contract, the "phone" price is added on to the monthly price, and goes away after 24 months. That said, for the last phone I bought (Nikola's iPhone 6), the subsidised price was only marginally better than the purchase price, and since it required changing to a plan that was worse than the plan she was already on, I ended up just purchasing it outright.

"In Oz (or at least for me), when you buy a subsidised phone on contract, the "phone" price is added on to the monthly price, and goes away after 24 months."

Well, assuming the listing on your monthly bill is explicit and mandated, you live in a country with (moderately) better governmental regulation on the topic than the US, though not nearly as good regulation as in the EU.

Back in the USA, the subsidies are completely hidden from consumers who aren't abnormally educated on the topic, meaning that when folks buy / upgrade an expensive smartphone, the great majority have zero idea that they are paying even a penny above the 'listed price'. So, an elimination of the subsidies here will result in significant modification of consumer behavior - aka a rather dramatic reduction of sales, and far more price-sensitivity.

-----

"As for the longer cycles of upgrades; I think that is inevitable anyway. The improvements of smartphones have been huge year-over-year but I think they are reaching a point where they are so good that they last longer now and the improvements become smaller."

Sure. But under the current North American sales scheme, when the upgrade appears to only cost $99 or $199 or whatever, it alters consumer decision-making. At that deceptive price-point, why not upgrade, even for only slight improvements, or purely just for peer status reasons?

"Back in the USA, the subsidies are completely hidden from consumers…"

Not on all carriers. I was under the impression that T-Mobile in the US already switch to the same model as Peter and I described. This is from the quoted article above:

T-Mobile’s already made this shift, factoring an installment cost of the phone into its plan price. When you pay off the phone, your plan gets cheaper. So if you decide to stick with your current phone for a while, you save money. Likewise, if you bring your own phone, you don’t pay the higher rate. If you want to switch to another provider, just pay off the cost of the phone, and you’re free to go—no pesky contracts mucking things up.

"Not on all carriers. I was under the impression that T-Mobile in the US already switch to the same model as Peter and I described."

True!

But the major caveat is that they're the 4th largest carrier with less than 15% of the market. So, indeed not all carriers, but 85%+ of US customers are still faced with obscurity of the actual cost of phones.

(And to get down into the weeds, should you be interested, T-Mobile only took that step in the first place because they have a notably inferior network to their competitors, and thus were desperately looking for some kind of other differentiation. They'd long tried to differentiate themselves by providing best-of-breed customer service, which this current initiative should be seen as a continuation of. Also, T-Mobile is experiencing both success and failure with the initiative; they've been increasing their customer count, but losing lots of money in the process. Obscurity in cost is good for the profit margins of not just the phone manufacturers, but also the carriers.)

In short, absent the kind of pro-consumer regulations on the issue that you've got in the EU, which are highly unlikely to happen here, I'd expect the transparency process in the US to advance quite slowly, and perhaps to even stall out completely if T-Mobile eventually blinks. Good news for Cupertino, and bad news for consumers...

The problem with this argument is that it presumes that the carriers will charge less if we pay for the phones up front. I predict that if we lose subsidies we will have the worst of both worlds: high bills and high phone costs.

Walt French

Meh: cancel the subsidies & allow carriers to sell the phone on a two-year installment plan.

I suppose on the latter, a buyer would have a good claim that the carrier had no justification for locking the buyer's phone; that'd be a downside for carriers. But not necessarily for Apple, Samsung or any other seller of rather pricey phones.

Yes, it's a downside that the customer keeps paying the inflated monthly charge even without upgrading. To date, that's been a minor concern: sell your old phone, upgrade as much — or as little — as you want, and let the higher charge earn its place on your credit card statement. More of a nuisance if phones get good enough that you don't care about the latest upgrade, but not a show-stopper, either.

The big US carriers are already experimenting with no-subsidy plans, too (I know Verizon is ["Verizon Edge"], and I believe AT&T has similar plans).

With Versizon Edge, the difference in cost is not much to write home about; monthly line charges are $15 or $25 (depending on the amount of data purchased) vs $40 on the subsidized plans. Some of the savings is offset by other factors and fees (and the phone cost), but ultimately you do come out ahead with an unsubsidized plan, particularly if you don't upgrade after your phone is paid off, at which point your monthly bill might decrease by about 30%.

Verizon is pushing the no-subsidy plan with some force (at least on its website; Edge shows up in the middle of the pricing rubric on the info page for the subsidized plans, so even if you don't select to look at Edge initially, you still get exposed to it) and marketing the plan as a good deal/discount, though once you plug all the numbers into a spreadsheet to get a true apples-to-apples cost, it's not such a huge savings as I think they'd like you to believe (and you're still under some sort of contract for 24 months).

The installment/full price model has the advantage that it exposed the real cost of the phone (that the customer is paying one way or the other). I think part of why Apple can get away with such high margins on iPhone is because the subsidies hides the real cost.

Apples margins on iPhone are extreme, even by Apple's usually high margin standards and is a big part of the reason that the iPhone generate such big revenues (other than they are selling a ton of them, of course).

One would hope that exposing the real cost of iPhone could make Apple consider lower these high margins slightly… (although it's not a given, the iPhone is selling quite well over here even though we have the installment/full price model, we just swear a little more while handing over our money).

Joe Rossignol:

Apple overnight removed the option to purchase a new iPhone on a two-year contract with AT&T on the Apple Online Store, eliminating the ability for customers to purchase an iPhone for a subsidized price of $199 or $299 through the carrier. Apple now sells iPhones on AT&T exclusively through the AT&T Next carrier financing program, while two-year contracts remain available through Verizon and Sprint.

As an AT&T customer, this seems like a move in the wrong direction because Next is more expensive overall.

Stay up-to-date by subscribing to the Comments RSS Feed for this post.

Leave a Comment