Feature Article

August 06, 2012

iPhones Cost Wireless Carriers a LOT of Money - Will the Next iPhone be the Last of Apple's Enormous U.S. Run?

A recent Wall Street Journal (WSJ) article points out that AT&T typically subsidizes the cost of iPhones for its subscribers at $420 per device – if users typically pay $200 (we’re excluding costs here based on memory configurations and focusing on the typical memory configuration most users get for $200), that translates to Apple typically collecting $620 per iPhone.

That’s a hefty wireless operator premium no matter which way the wind blows. At a minimum, according to WSJ, that’s probably $120 more subsidized cost per iPhone than even the most expensive Android phones (for example the Samsung Galaxy S III) will cost a wireless carrier to subsidize.

While it is true that the original Apple-AT&T deal altered the wireless data landscape forever, initially driving substantially increasing wireless data revenue and loads of new subscribers for AT&T (in addition to customers adding, over time, new wireless services that also added to new revenue), the tide has slowly been turning – a point of equilibrium between what the market can support in terms of generating new revenue, vs. the cost to generating that revenue (in particular, huge investments in next generation networks such as LTE, and the ongoing payment of the enormous “Apple subsidy tax”) has been reached and is now beginning to tip in the wrong direction for the carriers.

Apple relies on its products’ popularity to keep costs to the carriers at its traditional price points, and when the next-generation iPhone launches there is a distinct possibility that Apple might look to bump that cost up even more. Apple already knows – and independent research corroborates – that the next iPhone will likely prove to be the largest launch of any iPhone to date. There is no incentive for Apple to deal on pricing – it can safely rely on mobile user demand to keep the carriers in line.

The interesting question is whether or not the carriers will cave in, or whether they make concerted efforts to bring the equilibrium back into a fair balance. The odds are in Apple’s favor on pricing, which leaves the carriers with two alternatives: continue to change subscriber data plan cost scenarios and continue to raise fees and to add new fees; focus on alternative devices such as the Samsung Galaxy S III and the host of new offerings on the Windows 8 front that should arrive in time or the holiday buying season.

What Will Drive Apple to Reduce its Pricing?

The only thing that will cause Apple to lower prices would be a non-trivial drop in iPhone demand. It’s a safe bet that left to their own devices users won’t cooperate – they will continue to drive iPhone demand. However, what might happen if the carriers decided to take an aggressive subsidy stance on the Samsung S III and on high end Windows 8 phones (Microsoft itself could lend a financial hand here)? And what if AT&T and Verizon were to let the subsidized cost of the new iPhone go up substantially (though not to the point where users would simply go to Sprint)?

These are two strategies that in combination could conceivably blunt the anticipated Apple tsunami – maybe. Are there enough subscribers on current and unexpired data plans loaded with enough disincentives - longer periods to wait upgrade cycles, capped data plans with costly overage fees, high upgrade fees, and so on – to drive down typical Apple enthusiasm and demand?

In truth we can expect the next-generation iPhone to be impervious to any such efforts. The new iPhone, however, is likely to be the last great iPhone launch. Why? We believe it will finally begin to saturate the market (at least in the United States, where AT&T and Verizon primarily play) for iPhones.

To date, every next generation of the iPhone has fed into an unsaturated US market – there have always been deep pockets of potential users for Apple to rely on. Once that saturation point is reached the iPhone subsidy tax will finally disappear.

As the market becomes saturated – and if the carriers insist on limiting, or at least show the discipline to limit, the amount of money they are willing to put in for iPhone subsidies – there will be less interest from subscribers in upgrading quickly to next generation phones. It will become much harder for Apple to maintain the kind of growth momentum it is accustomed to (by its very definition, market saturation means growth opportunities have significantly diminished). Finally, if the carriers begin to aggressively subsidize the high end Android and Windows 8 phones and if vendors (especially Microsoft) cooperate with additional rebates, the final piece would fall into place.

For Apple to then repeat the iPhone’s initial success it would have to innovate well beyond what it does now. Think about it –core iPhone functionality hasn’t really changed since the original iPhone and Apple App Store launched. Since the revolution of 2007 it has all been evolutionary. Android hasn’t revolutionized anything – it is the one key reason why Android phones have never broken the Apple model. Microsoft has looked to differentiate based on its “Windows style UI” (the company is no longer using ”Metro” as a UI brand) but even here the entire effort remains evolutionary.

Can Apple drive new innovation for smart mobile devices? It’s an interesting thing to think about but think about this as well: we haven’t seen much new in the way of iPod or iTunes – mostly that line of business has ridden the iPhone’s coattails. What coattails will the iPhone ride on?

We don’t know…but this is what Tim Cook will need to figure out and make happen if he’s to put his own real stamp on Apple. If he does there is one thing we can be assured of - the carriers will once again happily pay a premium.

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Tony Rizzo has spent over 25 years in high tech publishing and joins MobilityTechzone after a stint as Editor in Chief of Mobile Enterprise Magazine, which followed a two year stretch on the mobile vendor side of the world. Tony also spent five years as the Director of Mobile Research for 451 Research. Before his jump into mobility Tony spent a year as a publishing consultant for CMP Media, and served as the Editor in Chief of Internet World, NetGuide and Network Computing. He was the founding Technical Editor of Microsoft Systems Journal.

Edited by Braden Becker

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