iPhone sales could be threatened as subsidized costs become more visible, say analysts

iphones

How much did your iPhone cost? If you said $199, $299 or even $399 you’re somewhere near $350 off. As some consciously forget, the carriers often shield the owner from the real total cost of the iPhone. That may not last.

iPhone sales could be hurt as carriers switch from so-called subsidized contracts, where customers pay only a fraction of the cost a new iPhone up-front, to deals where the true cost of the phone is more visible, argues a piece in the WSJ.

Many U.S. iPhone customers are not aware that the full cost of an iPhone ranges from $549 for a 16GB 5c to $849 for a 64GB 5s. The reason is that carriers have traditionally asked for only $0 to $200 up-front, hiding the balance of the cost in the monthly tariff. With carriers now switching to separate instalment costs for the phone, and the cost of upgrading every year or two more visible to consumers, analysts believe some will choose to upgrade less often …

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AT&T Inc, which reports first-quarter results Tuesday, sold 15% of its smartphones without a subsidy in the fourth quarter. UBS analyst John Hodulik estimates that figure will rise to 35% this year […]

Brian Marshall, an analyst at ISI Group, estimates U.S. sales of the iPhone fell 20% in the last quarter of the year following a flat showing the quarter before, as sales growth continues to slow.

The consensus estimate of Q2 iPhone sales was of year-on-year growth of just two percent.

Falling sales due to a switch away from subsidies is a phenomenon that has already been seen in the UK, where it’s common to pay the full cost of the phone up-front in return for much cheaper tariffs. The result has been more people holding onto their existing handsets for three years rather than two.

Not everyone thinks a move away from the subsidized model makes sense. Verizon’s CFO Fran Shammo said that the model “has done wonders for us in this industry, so I think to abandon that I think is a mistake.” But with both AT&T and T-Mobile pushing hard for contracts which separate the cost of the phone from usage charges, it’s likely that the shift will be a permanent one.

The big unknown in all this, of course, is what Apple will offer in the iPhone 6. Make that sufficiently compelling, and consumers will want it, up-front subsidy or not. A recent survey showed that 40 percent of North American consumers planned to buy the new handset, a higher figure than for both the iPhone 5 and 5s when also measured before any official announcement by Apple.

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Comments

  1. paulywalnuts23 - 9 years ago

    This could be the finally straw that pushes me to switch carriers… I have been on ATT since the original iPhone and have stayed there due to the fact that I am grandfathered into unlimited data. However if ATT ends subsidized phones and Verizon still offers them then I will have to look at making the switch, even at the cost of losing unlimited data.

    • Jack Broyles Jr - 9 years ago

      AT&T has not and I don’t believe will remove them. They have, however, made buying the phone an attractive option by making their recurring plan charges MUCH LOWER than they would be with a subsidized phone.

      I recently switched to their “no contract” plan and I have a shared data plan with 8 iPhones and an iPad. My phone bill has dropped over $200/month. It doesn’t take many months of that savings to pay for a phone.

    • I think you’re getting a little ahead of yourself. They only sold 15% of their phones unsubsidized in Q1 and even if Hodulik’s prediction is correct, just over a third of sales is still a minority. Going from 15% unsubsidized to 100% is a bit of a leap.

    • Wesam Abdallah - 9 years ago

      Why don’t you just go to Wal-Mart and put a phone on layaway? Even more, why are you buying things you can’t afford anyway? As the article implied- subsidized phones only cost more in the long run because true cost is hidden thus allowing manufactures to bolster their margins. Best Buy, Amazon and Target should sell hardware, leave the services to the carries.

  2. iSRS - 9 years ago

    While that may be true, the carriers want to sell them as well. So they will do payment plans, and have shown some willingness to “reduce” the monthly fee for not subsidizing a phone. In the end, it will be somewhat of a wash.

    • Ben Lovejoy - 9 years ago

      Financially, you’re usually better off paying for the phone separately – but the cost does become a lot more visible.

      • Tallest Skil - 9 years ago

        I don’t know about that. Your plan price is the same regardless of if you subsidize or not. You pay less by going the subsidized route.

      • Ben Lovejoy - 9 years ago

        Not with non-subsidized models. There the cost of the plan is substantially lower. As an example, I could choose to pay £100 for a 32GB iPhone 5s and then pay £46/month for unlimited minutes, texts & data on a 2-year contract. Instead, I could pay £629 for the phone and £15 month for the same unlimited minutes, text & data – a saving of £31/month. £31 x 24 = £744 + £100 for the phone, so on a subsidized plan the phone ends up costing me £844 instead of £629.

      • Tallest Skil - 9 years ago

        >>Britain

        See, there you go. In the US, plan prices don’t change based on how you purchased your phone. That’s why subsidies matter here.

      • Ben Lovejoy - 9 years ago

        Right, but that’s what’s likely to change.

      • Tallest Skil - 9 years ago

        Really? Where have you heard anything about US carriers changing their monthly plan costs based on subsidization? I’ve heard they’re going to stop subsidization, but it’s laughable to think they’ll actually let us pay less per month.

      • Ben Lovejoy - 9 years ago

        See above – it’s already started.

      • Jack Broyles Jr - 9 years ago

        NOPE- See my post above. Saving more than $200 monthly with AT&T Value Shared Data Plan. No Contracts and MUCH CHEAPER rates.

      • Mark Choi - 9 years ago

        Um, someone was not paying attention. The entire point of the article was that the U.S. carriers are moving away from the subsidy model. As they do so, they are introducing plans that are reduced in price for non-subsidized head sets. The price DOES change if you BYO. That is why subsidies will NOT matter here for those who want those plans..

      • “In the US, plan prices don’t change based on how you purchased your phone.”

        Except that they do. On AT&T’s mobile share value plan (In the US), your per line cost decreases by $25 if you do their “Next” payment plan instead of getting a subsidized phone. Of course whatever you’re paying for the phone is added back on as a separate device cost, but saying the plan price doesn’t change is just plain wrong.

        Like Ben said, what this does is make it more clear to the consumer what they’re paying for the phone itself and what they’re paying for the service, even if the overall price is similar.

  3. rogifan - 9 years ago

    How many years now have Wall Street analysts been fretting over this? When are they going to find something new to be concerned about?

  4. cmonmun - 9 years ago

    “Falling sales due to a switch away from subsidies is a phenomenon that has already been seen in the UK, where it’s common to pay the full cost of the phone up-front in return for much cheaper tariffs. The result has been more people holding onto their existing handsets for three years rather than two.”

    I see you pushing this line of argument regularly, but it gives a distorted view of the UK market.

    The rise of pre-pay/PAYG tariffs in the UK occurred between 1996 and 1999. Back in 2000 pre-pay subscribers overtook post-pay/contract subscribers.

    Most subscribers in the UK now are on a contract, and that percentage is increasing due to the increase in smartphone usage and the wishes of consumers to spread the costs of the phone over a longer term

      • Warren Brown (@WazBrown) - 9 years ago

        I’m with cmonmun and also agree have seen you push this point before which I don’t believe is true. The figures you show refer to a growing proportion of SIM only contracts. These do not necessarily mean that people are buying new phones and SIM only contracts to go with them. You need better facts to substantiate your claim as I believe you are giving a false impression to your US audience. The fact that you do it (as below) doesn’t make it a general trend.

      • Ben Lovejoy - 9 years ago

        A SIM-only contract only makes sense if you are buying the phone separately.

      • Warren Brown (@WazBrown) - 9 years ago

        Not true, you may already have a phone from an expired contract, inherited a second hand phone (in some way) or be making a switch from PAYG to post-pay. In the current economic climate this is likely. Very few people have the disposable income available to be able to purchase a brand new phone and a SIM only contract.

      • Ben Lovejoy - 9 years ago

        That’s the point being made: people may hold onto phones longer when the full cost is visible.

      • Warren Brown (@WazBrown) - 9 years ago

        I get that but the point I’m making is to counter your argument of (in the UK): “it’s common to pay the full cost of the phone up-front in return for much cheaper tariffs”…which I don’t believe to be as common as you are making out.

      • Ben Lovejoy - 9 years ago

        We can agree it’s not the majority doing it (yet, at least), but I think ‘common’ is a fair description for something done by a sizeable minority. (Among my friends, it’s by far the majority.)

      • Warren Brown (@WazBrown) - 9 years ago

        I’ll go with that (but don’t forget the sort of circles you, I, and the reader of this website are likely to be different than those who don’t)…pleasure debating the issue!

      • Ben Lovejoy - 9 years ago

        Yep, I’m sure you’re right that there’s quite a strong bias towards etcher people among SIM-only customers, if for no other reason than we’re the most likely to be aware of the way the finances work. Likewise, pleasure discussing.

    • I don;t know anyone in the UK with s subsidised contract now, they are ALL on SIM ONLY contract, and upgrade when they want, which with an iPhone is far cheaper than any subsidised contract due to the fact that iPhones have a value after 12 months, you get about 80% of the cost straight back when you sell on Ebay thus the cost shift is significantly less…!

  5. PMZanetti - 9 years ago

    All of the carriers have already made the only move they have. They have all introduced 0 down, $xx/month plans for the iPhone. What’s more, these plans allow you to upgrade every 12 months, which is otherwise impossible.

    Your options for a 16 GB iPhone are now as follows: Either pay $199 up front and own the phone, but forget upgrading it for at least 18 if not 24 months. OR, pay the tax up front, and pay around $25-35 per month for 12 months to rent the phone, then trade it in, and get the new iPhone, and start again. If you don’t need the new iPhone, pay the same for another 8 months and own the phone.

    • Ben Lovejoy - 9 years ago

      Or buy it outright, which is what I do in the UK. I then pay a very low tariff for unlimited everything which leaves me in profit if I upgrade after two years, or even more so if I leave it three.

      • o0smoothies0o - 9 years ago

        Yeah, and the fact that it isn’t that hard to find someone that will pay within $150-200 for the phone in a year when the new one is released, assuming you kept it in good condition.

      • Ben Lovejoy - 9 years ago

        Yep, mine usually survive unmarked despite not using a case, so I get a decent amount back.

  6. Mr. Grey (@mister_grey) - 9 years ago

    Of course the carriers don’t want to switch away from the subsidised model, it makes them huge amounts of money because they get the subsidy back (with interest!) and the customer is locked in.

    Of course “sales are down” when the subsidised model is partially eliminated, because people aren’t being tricked into paying more money for the same phone or trapped in cyclical contracts.

    No subsidies is the first step to cheaper phones, and the carriers are only grudgingly offering the option due to increasingly vocal demand for it from their customers.

  7. In the Nordic countries they removed subsidises 5-6 year ago. Instead we got much cheaper traffic tariffs. In 2007 10 gig data cost under 10 dollars.
    To lock customers in contract they instead “lend” money for the phone. You get a “free” iPhone but have to pay a 30 dollar/month fee for the phone/24 months.

    As usual customers are always shafted at the end. Last year the carriers started to increase the prices on data trafik by insane amount of money. This even when Data trafik is cheaper for the carriers today than before LTE and fibre network linking the base stations.

    My current contract give me unlimited data for 50 dollars/month. Have used over 2 terabyte data since Nov 2013. The new contracts have removed unlimited data and instead gives 10gig for 50 dollars.

    This leads to: Why have LTE/LTE-A when you have 10gig limit? You can burn thru that data in minutes. This is the problem with carriers that have a oligopol and can charge whatever they want. The carriers are dumb data pipes. This is an utility. One of the few things that government should regulate because this is infrastructure that are needed. Not carriers that today can print money since no one else can get radio spectrums.

    To bad that Steve Jobs crazy idea building his own network did not happen. Using unlicensed radio spectrum introducing their own standard.

    The price for the iPhone is the reason why Android is killing iPhone outside USA. My unlocked iPhone5S 32gig cost over 1200 including taxes. A working Android cost 300 dollar.

  8. myke2241 - 9 years ago

    dumb article, sammy phones are really not that much cheaper. so to imply apple customers will solely suffer is not true. everyone will see a decrease in sales. i don’t think so much for apple since its customers are more willing to pay more for tech products.

  9. Chris Lee - 9 years ago

    T-Mobile is already letting customers know what the full price of the device is, and while they may charge a little more than just buying the device outright, it gives them the opportunity to make payments on a monthly basis and separates the cost from their service bill in order to give the customer true ‘transparency’ as opposed to the other carriers who hide the costs in their two year contracts.

  10. jrox16 - 9 years ago

    People have been saying this for a while now, and I never understood why it’s always about Apple and the iPhone, can someone explain? The cost of a new Galaxy S5 or HTC One M8 is essentially the same, unsubsidized. So why would only iPhone sales be the issue?? In fact, iPhones should be less impacted because people who tend to buy iPhones and Apple products in general and slightly more willing to pay more for higher quality. An unsubsidized Galaxy S5 is $649, same as iPhone. What’s the issue here?

  11. NQZ (@surgesoda) - 9 years ago

    $207 cost for the 32 GB iPhone 5S to build (according to teardown and component pricing), yet off contract, it’s what, 799$? Yeah, can you say markup? Subsidies suck, but so do device manufacturers marking the hell up out of their stuff.

    • jrox16 - 9 years ago

      You don’t understand…. that $207 is the cost of materials of the device, the hardware itself. What about the hundreds of millions of dollars spent on development and testing, marketing, and to cover all of Apple’s engineers, designers, and overhead costs? It’s not as if $600 is pure profit. They might make $200 to $300 profit on each phone, that is the markup you’re thinking of. There’s another $300 to $400 in there that has to pay for all the things I just listed. I work in manufacturing. If you just added up the cost of our final product, you’d be far away from what it actually costs to make it, without any profit even.

  12. rlowhit - 9 years ago

    We as Americans prefer to have the wool over our eyes. It is easier to understand.

    • herb02135go - 9 years ago

      Funny how everyone here is claiming one way is the best way.
      It truly depends on the particular deal you get at the time.

      A recent visit to an AT&T store offered three different ways to buy the product. The consumer should do the math.

      Also, if you have a contract that is winding down you should call the carrier monthly to get a better deal. For the last five months I’ve had credits, extra minutes, etc., to keep me from terminating my contract early and going to a competitor.

      • Ben Lovejoy - 9 years ago

        Yep, that’s always good advice. Amazing what hitting the ‘Thinking of leaving us’ option can get you. :-)

  13. heymuzzwatchadoin - 9 years ago

    Only morons thought that new iPhones only cost the $x99 price tag. And only morons keep re-upping on craptastic carrier contracts that extract rip-off prices and lock them down for years. I’ve never been happier since ditching contracts and going TMOUS with no-limited-anything and buying my phones on installment.

    • herb02135go - 9 years ago

      If you’re buying a phone on installment then you are paying for the financing.
      And when you’ve finally paid it off you have a phone that’s obsolete!

      This is very much like the Gillette model of business, except that in this version the consumer pays too much for the razor AND the blades!

      • ackkwk - 9 years ago

        Most companies offer 0% financing, so you’re essentially leaving money on the table if you purchase the phone in cash.

      • ackkwk - 9 years ago

        I should say that by “most companies” I mean “most companies in the US”. We have by far the most developed consumer credit market though so maybe this is a US specific thing?

  14. roberthildenbrand - 9 years ago

    I actually see this as a good thing, the consumer should know the full cost of the phone. It will force Apple to innovate and reduce the cost of the phone, so to be competitive against their rivals. Capitalism flourishes best when there are no secrets, and all parties are speaking truthfully.

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Avatar for Ben Lovejoy Ben Lovejoy

Ben Lovejoy is a British technology writer and EU Editor for 9to5Mac. He’s known for his op-eds and diary pieces, exploring his experience of Apple products over time, for a more rounded review. He also writes fiction, with two technothriller novels, a couple of SF shorts and a rom-com!


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