Would You Pay $850 for an iPhone if Carrier Subsidies Disappeared?

  • Share
  • Read Later
Apple

The Apple iPhone 4S with its 3.5-inch, 960 x 640 LCD screen.

How much would you pay for an iPhone if you had to pay full price? More than the $200 or $300 you did for the smartphone you currently own? How many people even know the iPhone’s actually a lot more expensive than one of Apple’s baseline $500 iPads? Would you fork over $600? $700? Upwards of $800 for the current top-end model?

Carriers have been playing hide-the-real-price with phones for as long as I’ve owned a cellphone, luring you into a multiyear contract in trade for shaving off one-half to two-thirds of a phone’s standalone price. And with today’s phones-that-are-really-mini-PCs, the cost difference can be so dramatic, that if you already have a contract with a carrier and want to pick up a newer model phone before you qualify for an upgrade, it’s sometimes cheaper to opt out of your contract and pay the cancellation fee than to pay full price for the new phone (I saved over $300 doing this when switching from a low-end LG flip-phone, under contract, to an iPhone 4 in February 2011).

(MORE: Claim: Next iPhone to Have Huge 4.6-inch ‘Retina’ Display)

Most of us know about the subsidies (though I daresay most couldn’t tell you the real price of a smartphone on the spot). Virtually all of us are grateful for them. So your eyebrows may elevate when I say that Apple — that is, AAPL, the company’s stock name — was just downgraded from “buy” to “neutral” for the first time since October 2011 by an analyst whose rationale is that the days of cheap phones courtesy those precious carrier subsidies are coming to an end.

“We expect post-paid wireless operators to remain firm in their plan to stunt the pace of phone upgrades in 2012 and we expect to see some initial evidence of their success in the current quarter,” wrote Walter Piecyk, a BTIG Research analyst in a note released Monday (via CNBC). “This will increase the need for Apple to grow its business in the pre-paid dominated emerging market space, in which handset subsidies are a rarity and the $600 ASP (average selling price) of the iPhone represents a big chunk of a household’s monthly income.”

It’s important to note that Apple’s bill of materials (including manufacturing) for the iPhone 4S, as estimated by iSuppli, is $196 (16GB), $215 (32GB) and $254 (64GB). Assuming iSuppli’s in the ballpark, Apple’s cost is essentially at parity with the subsidized price on the 16GB iPhone 4S ($199 with contract), but the disparity leaps to $85 and $145 on the 32GB ($299 with contract) and 64GB models ($399 with contract) respectively. You have to factor in packaging, shipping and marketing, of course, which means Apple’s probably taking a hit on the 16GB model, but that may not be the case on the two higher-end versions, and it’s certainly not the case if we’re measuring in terms of the iPhone’s actual retail list: $650 (16GB), $750 (32GB) and $850 (64GB). There’s a lot of theoretical cost headroom in these devices, and that’s well before we start throwing around phrases like “economies of scale.”

(MORE: How Apple’s iPhone Actually Hurts AT&T, Verizon and Sprint)

Subsidies are inarguably a critical driving factor in the iPhone’s success. We’d probably still buy iPhones without them, but I’d wager you’d see monthly buyers cut in half. That’s subsidization’s upside. Its downside is that it creates the illusion of cheaply had cutting-edge technology — call it a “consumption bubble.” Subsidies create an expectation that top-end smartphones like the iPhone should always cost a relative pittance. They also create a sense that the iPhone’s more like a high-end calculator or toy — valuable, but ultimately disposable, as opposed to something like a $700-$900 laptop, say a MacBook Air, where at those prices, you’re expecting several years or more of use before buying whatever’s next.

Should subsidies thus go away, as T-Mobile’s chief marketing officer recently argued? Digital Trends’ Geoff Duncan has a fascinating breakdown of what he reasons are the cost relationships between Apple, carriers and consumers, including how those costs get rolled into contracts and what carriers are making in terms of the bottom line ARPU (the “average monthly revenue per customer”). His conclusion is hard to argue with: The ARPU has been steadily increasing for every iPhone carrier for the past two years, so even with subsidies, everyone’s making a tidy profit. Drop the subsidies, and any corresponding breaks you’d expect carriers to offer on pricing plans would evaporate as the number of people willing to fork over $650-$850 for a new phone plummets. Thus, concludes Duncan:

In that scenario, the growth of the smartphone business in the United States would be cut roughly in half. That means fewer devices out in the wild, less money for device makers, and that translates directly to a slower pace of innovation. It also translates to a smaller, less vibrant developer community, which translates to fewer apps and less content for mobile devices. It also means less investment in mobile from Wall Street and other investors. If mobile operators can’t show strong adoption of mobile technologies, investors and banks are will be less willing to throw their money behind network upgrades, frequency licenses, and service expansions.

Taking that into consideration when evaluating yesterday’s analyst AAPL downgrade news, I think the safer assumption going forward is that we may see “tweaks” to Apple’s agreements with carriers, including the way subsidies and multiyear contracts and up front device price breaks work. But subsidies won’t go away. If everyone’s making money here, the issue’s not “to subsidize or not to subsidize” in all or nothing terms, but how to spread the profits around in a way that’s viewed more equitably by all parties involved.

To answer my original question, I don’t see myself ever paying $850 for an iPhone. What about you?

MORE: Why the iPhone Has a Head Start on the Future of Personal Computing

0 comments
Sort: Newest | Oldest