Smartphone manufacturers have made great strides for several years in getting carriers to subsidize their devices. A $600 iPhone at Verizon ""costs" the consumer only $99.99 if they sign up for a 2-year plan.
The subsidy has been a competitive weapon for each carrier as they vied for a share of new users. At the same time, the carriers have used the subsidy as a means of "locking in" the user to a 2-year contract in an effort to retain subscribers and prevent competitors from poaching.
However, with the maturing and ultimately the saturation of the market, revenue from new subscriptions has declined and is approaching zero.
To make their own economics work, the carriers have had to create opaque contracts that suggest a low monthly fee but imply a much larger one if the subscriber goes over limits on voice, data, texts or whatever, or makes use of their phone in certain hours. Data usage has become the key driver, with exponential growth in data service fees taking centre stage in carrier economics and approaching $90 billion for the industry in 2013.
Apple (NASDAQ:AAPL) wants to sell a lot of iPhones and the price is important. The price has to work for the carrier too, since carrier support is an important key to sales. The carrier subsidy makes it possible to reach consumers who might balk at the $599.99 price. Having granted the subsidy, the carrier needs to make out by having users encouraged to make use of a lot of data, ideally more data than their base plan covers.
Apple's plays a subtle role in this. If you have a "qualifying" voice and data plan you might have discovered that your monthly bill is a lot more than you bargained for. One reason is the pre-loading of iPhones with apps that "push" data to your phone 24 x 7. Apple support provides users with information as to which apps "push" data and how to manage the data usage.
The carriers understand this equation and make sure they benefit from it. For example, if you buy an iPad 2 from Verizon on a post paid plan you are required to have a data plan even if you only intend to use the device primarily on WiFi. Moreover, the device will default to the carrier's data rather than WiFi unless you alter the default settings to ensure it does not. This excerpt from Verizon customer support illustrates the point.
The point of this article is not to criticize either Apple or the carriers. They are doing what is in their interests and informed consumers have the ability to manage their own affairs. The "sticker shock" of a high bill from one's wireless carrier should be enough to prompt any user to look into the issue more deeply and make the necessary changes.
Rather, the point of the article is that smart device subsidies have been a critical element of iPhone sales in bringing the apparent cost of an iPhone down to a level affordable by a wider range of consumers. More importantly, this is very likely to change in the near future.
In a Tech Crunch article published December 11, 2013, author John Biggs declared "The end of the subsidized phone could be near". He pointed to comments by AT&T CEO Randall Stephenson:
If Stephenson is right and the era of subsidized phones is going to end, it has major implications for smart phone suppliers and particularly those with "premium" price strategies. The actual cost of the phone will no longer be hidden in monthly fees arising from opaque contract terms and arguably offensive default settings on the device, but will be in the open for all to see. Competition will shift from the carriers to the smartphone suppliers, and price will be an issue.
The smartphone supplier with the most to lose in such a shift is Apple, while the one with the potential to benefit considerably is Microsoft (NASDAQ:MSFT). While Apple has been able to sell its iPhones costing about $200 to make for close to $600, unlocked Lumia smartphones with similar costs and features have been available for prices from $199 to $549 depending on the model. The wide range of lower cost Android smartphones will also have a competitive edge over Apple on nose-to-nose pricing.
Apple has long had an advantage with its extensive ecosystem, but the growth of Google Play and steady improvements in the Windows Store have leveled that playing field considerably. The coming months will tell us whether brand alone will be enough to sustain Apple's strong showing in North American markets. I suspect it might be tough sledding.
I have no position in AAPL at this time but will short it into any strength.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I closed out my April $485 Apple puts for a nice gain. I will likely short AAPL stock if it pops on any CHL