U. S. carriers to cut iPhone subsidy? Why it won't happen
Summary: Analysts are predicting that U. S. carriers are going to renegotiate lower costs from Apple for the iPhone. Here's why that won't happen any time soon.
Updated: Carriers in the U. S. live and die by the smartphone subsidies they have to give customers to get them to sign the all-important two-year contract for service. The subsidy on a new phone is paid to the OEM by the carrier to bring the out-of-pocket cost to the customer to a level that entices the sale. It is common knowledge the carriers have to pay a higher subsidy to Apple for the iPhone than they pay for other phones.
Analysts have gone on record stating a mutiny is coming from the carriers in the form of better terms with Apple to get the subsidy down to that paid for other phones. The explanation is that carriers' margins have dropped, in large part due to the higher cost paid to Apple for each iPhone sold.
AllThingsD points out that won't likely happen since the carriers' contracts with Apple are not expiring any time soon. That may be, but there's a bigger reason that Apple is not going to let carriers dictate a lower subsidy on the iPhone.
The iPhone is so popular with customers that high demand puts Apple in the driver's seat for any negotiations with carriers. Verizon's latest financials point out that the iPhone accounted for over half of the carrier's smartphone sales last quarter. The single iPhone outsold all the other phones Verizon offers.
Each of the 3.2 million iPhones sold by Verizon was accompanied by a two-year contract for service. That's a lot of revenue for service which is where Verizon (and other carriers) make their real money. They are a service company foremost and a phone retailer second. The latter business practice is strictly to push the former.
AT&T is also selling millions of iPhones making it a significant source of service activations for the carrier. It sold over 7 million iPhones in the last quarter of 2011.
Update: AT&T's figures released today show the iPhone is carrying the team. Out of 5.5 million smartphones sold by the carrier in the latest quarter, fully 4.3 million of them were iPhones.
It is reasonable to assume the three carriers, AT&T, Verizon, and Sprint, are selling far more iPhones than all other smartphones combined. While the high subsidy paid to Apple nips into the bottom line, that is far out-shadowed by the gains on the new service. It is safe to assume that the lion's share of those new iPhone activations would not go to other smartphones if the customer had to pay a lot more out-of-pocket for the iPhone. Many of those sales would not happen.
The carriers are now dependent on iPhone sales to keep their business as high as possible. Doing something that would stop customers in their tracks is not in the carriers' best interest. That's why they will gladly keep paying Apple top dollar for the iPhone.
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Talkback
Safe how?
As the Kindle Fire, HP TouchPad, etc. should have shown, price is a HUGE factor. Sure, they don't sell as many, but are you saying that people that "need" an iPad, but can't afford it, go without a tablet?
Please show some data to support your claim. Otherwise, this is just FUD.
Even though I'm a bit of a fanboi...
and the carriers don't care what people get
Nope, they'll go to the store that still sells iPhones
Thus there is real economic pressure for carriers to make sure they can still sell iPhones. The author's point is valid.
In Which a Geek Quote is Applied for Geek's Sake.
We should be clear, we are discussing the US which has its quirks as a market.
I don't see a carrier unilaterally raising the price. After all, how could Apple stand up at its events and say the iPhone 4S will be $199 (sans asterisk about prices may vary) unless there were contracts to enforce the price?
At another level, I can see ways that Apple protects itself from a carrier freeze-out, via the Apple store and through the iPad. Let's pose this hypothetical, let's say I, Johnny Applefan (not my real name) trots on down to the store for his next iPhone, but somehow all the carriers have agreed that if I want a phone that works on their network, I pay $299 up front for the $199 model. Do I go Android or Windows Phone? Well, maybe. I am more likely, though, to get a cheap phone with no data plan and rely on my iPad for data, services, and apps.
Meanwhile, I expect it will be dubbed the Day for Dancing at Sprint should AT&T and Verizon bump up their iPhone prices.
If you read between the lines, AT&T and Verizon are miffed that their service margins are starting to behave like service margins and they are complaining because their piece of the pie is relatively smaller than it used to be. It's still a big pie.
Their strategic response is to try and promote other phones, because once Apple's primacy declines, then the carriers have the leverage for the negotiating they prefer, which looks more like dictation than discussion. Until then, Apple will glower at them and say regarding their deal "Pray I don't alter it any further." Which is ironic because it's AT&T with the Death-star logo.
That Lumia 900 on AT&T sure has a nice price, doesn't it?
Ironically, you are supporting what you are against
Second- how many people carry around their tablet an equal amount of time during the work day, commute, etc. as they do their phone? While I can't give a hard number, looking around at a gym, at a restaurant, etc. should give you a pretty good idea people don't want to carry a 10" screen. Again, this might be what a die hard Apple fan does, but not your typical consumer.
Apple can sell the iPhone from its store for $199, that's fine. If you don't think a company that's unhappy with a contract it has is going to keep that contract, ask yourself why people pay ETFs all the time, switch carriers all the time, etc. The ironic part is that the carriers can charge more for the iPhone and then lower their rates, which would keep most people. Most expensive part about a cell phone is the contract. And we've already seen people don't care if an item is being killed off (Touchpad), price trumps all.
I do have to say, your "...how could Apple stand up..." part made me laugh out loud. Apple can say those things because of the deals they have negotiated with the carriers. The same carriers that made the iPhone a hit can go and cripple the iPhone. Yes, it might be difficult and, at first, some people might scurry around for a year or two. In the end, a company wants to be profitable. If Apple has a carriers arm twisted too tight, it makes business sense to slowly twist back. Verizon and AT&T have both said they want to push Windows Phone to become the third platform. Do you think this is because they really need a third option or because the iPhone costs them too much and they need a second option for Android? The carriers what the phones that they can sell and make the most profit on.
All gas stations don't charge the exact same for gas, but some people are still willing to pay more at their favorite station. Most people, however, go for the lowest price.
I'm not implying the iPhone will disappear. I can't really fathom the iPhone reaping these kinds of profits for too much longer. Between carriers seeing that they are bleeding profits and the loss of the worlds greatest marketer/promoter, Apple might be good for another year or two, but long term, the carriers are losing too much money to allow the iPhone to remain at the current prices. Their design plans were probably set, before Steve Jobs died, for another year or two. Sure, they could have had prototypes for even further, but they don't know the cards the competition holds. Something like Nokia PureView with its 41 megapixel camera probably wasn't really on the radar or a worry. That will probably be something to worry about with the iPhone 5 (based on all the rumors that Nokia is bringing the technology to Windows Phone 8 coming out in October).
And if you think that carriers are worried that Apple will twist their arms even more, take off your rose-colored glasses. Investors would run away from the carriers if they agreed to a much worse deal for them.
Not likely...
I can see sprint doing this and possibly even AT&T as they are both taking a beating in subsidies. Verizon seems to be able to leverage their networks to make a profit off their phones.
Bottom line is, these companies will do what is best for their company.
Who doesn't know the impact of subsidies before they contract to sell?
Sprint is taking a beating more heavily in most everything else NOT related to phone subsidies. Apple is an easy target for the impact subsidies have on carriers bottom lines, but Sprint's losses can be more pointedly attributed to its poor acquisition decision and dubious management of Nextel and its spectrum assets.
AT&T just experienced a VERY profitable quarter, but the way. They must be in so much pain from lifting those bags of money. Hell of a beating, eh?
Correct!
Apple rip-off
Dumbth
The number is around 80%
Believe me, if you are a carrier, you will fight hard to get a bigger slice of that pie.
Furthermore, the idea that "the single iPhone outsold all the other phones Verizon offers" means Apple holds a lot of sway over Verizon may be misleading. Verizon still grew their subscriber base faster than rivals when they didn't sell the iPhone. They could probably keep doing that. Furthermore, they have to do the math of profits per phone x phones sold, and they may get a higher product with non-iPhones, even if they sell fewer of them. Thus, they may have more leverage than you think.
Ah but where do these profits come from?
Could it me Apple's iDevices eco system? Assessories sales on or in the Apple store? The question I have is do the "carriers" have any or much claim on Apple's profits or did Apple create an environment to make said and it is up to others to figure out how to do so. Both carriers and OEM's of alternative wares?
Pagan jim
As a business model I would have to say no Apple's profits
Pagan jim
Look up the phrase "consumer education"
So, in essence what you're saying is 'the consumer is so clueless that nothing will change their minds.' And sadly, you may be right.
Ah the excuses... Love em!
So what you are claiming is that in reality these are not satisfied customers but ill informed dolts. Nice but given that a great many of these people have experience with alternatives both in the computer field where it is still the norm to find oneself sitting behind a desk facing a Windows PC. Prior to the iPhone there was Palm, BB and yes MS pushing their wears in the phone business and now android. As for tablets there was an entire decade of previous tablets that did not sell well but none the less were there for the consumer to use/try as well as businesses. The simple fact is that when the iPhone and iPad came out the consumer had another choice and many choose to do business with Apple and not many have regretted it. Still let us not focus on the fact that these consumers have experience with alternatives and have had such for as long as Apple has existed over a few decades now in fact no lets make stuff up like RDF and now some sort of programming scheme where if one see's an Apple related add they are indoctrinated and can not but help to purchase an Apple product or three:) Love it... BRAVO!
Pagan jim
As my econ professor once told me
On the Acceptability of Margins
The smartest business guy I ever met asked me this question (back in the late 80s) "Among FedEx and DHL and Overnite Express, who's the leader?" "FedEx" "And who has the best margins? FedEx. The leaders in a market usually have better margins."
I suppose there's a nuance regarding commodity markets, but overnight delivery then and smartphones now aren't those.
For years, I've been working out why, and I think it comes down to value. If the vendor has a product or service that does what the customer wants in the way the customer wants it, the customer will pay more for it. That's why people sent correspondence via two day service back then rather than plunk down twenty cents for handling by the US Postal Service.
Value is subjective and possibly, for a short-term time frame, malleable via marketing. Which is why, today, as I write, there are advertisements airing saying this airline makes it fun to fly or that bank is friendly and likes to say yes or this processed food is gourmet quality.
Riddle me this...
Given neither of those are likely to take place, it really comes down to Apple's margins vs. the carriers'. From the consumer's standpoint, does it really matter whose pockets they're lining, if at the end of the day, they're paying the same amount?
PS - who created the subsidized hardware model in the first place?
the carriers, of course