A Subsidy That Could Kill the Carriers
It will be an understatement to say that the U.S mobile market is one of the most important ones in the world – for its size, ability of the customers to pay for more expensive services, and the faster device refresh cycles.
In the U.S, carriers typically subsidize the handsets heavily to cajole their new and existing customers into long term contracts – to buy customer loyalty and more stable revenue streams. All subsidies are not created equal, and some come at a tremendous cost to the carrier. For example a typical high end smart phone running Android usually goes for a full retail price somewhere in the neighborhood of $500-$600 per unit, and they sell for about $199 with a 2 year contract with the carrier.
The unequal amongst equals is iPhone. The lower end 16GB version of the iPhone, with typically much lower specs than the greatest Android, goes for $650 to $700 at full retail. Yet iPhones are sold for the same $199 price with a 2 year service contract. Essentially, iPhones are subsidized to the tune of $450 to $500 per phone. Is anyone wondering why iPhone is one of Apple’s most profitable businesses?
It would be interesting put this subsidy in context of the another product that Apple sells to the consumers – the iPad. The lower end 16GB iPad with much larger display screen sells for a full retail price of around $500 and even the 4G version could be bought for just $629. So why are the carriers lining up to part with their profits for getting the iPhone on their network? Crazy thought, isn’t it? The usual explanation is that the most well paying customers want the iPhone and if the carriers don’t provide it, the customers would flock to the networks that do. There is certain merit to that argument, but the carriers should ask themselves – at what cost?
Take a look at the following chart and see if you can find the magic that iPhone exclusivity brought to AT&T’s share holders!
In case you are still wondering, the answer is, it didn’t! AT&T is now scrambling to promote Nokia’s new sexy Lumia 900 devices as an alternative to hitherto most desired device – the iPhone. Grapevine has it that AT&T the launch budget for Lumia line of phones is a lot higher than what they spent on the iPhone launch. AT&T has even replaced the phone on some of their ads, even in those that don’t make Lumia 900 by name. In the Bay Area, I hear AT&T’s 4G LTE ad on the radio all the time always followed immediately by an ad for “beautifully different” Nokia Lumia 900 4G phone.
AT&T is not alone in expressing an interesting in promoting a viable flagship alternative to not just the iPhone but the plethora of Android handsets. Verizon joined the bandwagon recently during its earnings call. Verizon’s CFO, Fran Shammo, said the company wants a strong third software competitor in the mobile market. Hallelujah, for the late realization. He went on to add that “We’re really looking at the Windows Phone 8.0 platform because that’s a differentiator. We are working with Microsoft on it,”.
Is this a new recognition by the carriers that the partnership with Apple is taking them to the cleaners? It does, from the looks of it and if it is, this is good news for most parties involved – more competition amongst mobile platform will fasten the innovation in the industry, will likely to lead to better consumer products, lower prices, and, last but not least, happier carrier stock holders.
This is not to say Apple’s profit machine is about to come to a screeching halt. Far from it. First, the carriers are not yet announcing any reduction in subsidies for iPhone just yet, and even if they did, Apple still has a lot of the world left to derive its top line and bottom line growth from. Second, it is still too early to say that these new campaigns, new promises, and new strategies will amount to a hill of beans. While I am no qualified expert on financial matters, I am hopeful that Apple’s profit gold mine will continue to crank out nuggets. Apple as a company is in the zone. Momentum, either positive or negative, is a crazy thing, it can go on for a long time and will only stop when no one expects.