Could iPhone Subsidies Be Apple’s Ticket to Mainstream USA?

Rumors have been flying this month that Apple (AAPL) and/or AT&T (T) will begin subsidizing iPhone sales, which could total up to 50% of the device’s current selling price. That would mean getting an iPhone for $199 with a two year contract, the kind of price consumers have come to expect for standard high end handsets.

Back in June 2007, just before the original iPhone was released (has it been a year already?!), Compete published a study on the potential consumer impact of the iPhone. One question asked of online shoppers interested in purchasing an iPhone was how much they were willing to pay for the device. We saw the following:

According to these data, there’s a clear sweet-spot in terms of price. 71% of survey respondents said they would be willing to pay more than $100 for an iPhone. Considering the iPhone’s initial price of $599 and subsequent price cut to $399, it appears that further price cuts could tap into a much larger group of interested consumers.

Now, AT&T and Apple aren’t talking about the costs are or margin structure is for the iPhone, and I don’t know if current economic issues may shift consumers’ willingness to pay. And I’m also not convinced that large subsidies are consistent with Apple’s high-end, highly-controlled brand image. But, if Apple truly wants to go mainstream with the iPhone and see market share numbers closer to what the iPod family of devices enjoys, lowering the iPhone’s price (again) may be just the ticket.

We should find out Apple’s short-term iPhone strategy in June when Steve takes the stage for his keynote at Apple’s Worldwide Developers’ Conference. Until then, the speculation continues. What moves do you think Apple will make? Leave a comment and start a discussion with Compete.

Comments

[PK de C'ville:]

I'd like Apple to sell the iPhone for $200 more than it does now with the customer getting a $200 rebate from ATT subscription charges. In this way, the unlockers help Apple's bottom line because their extra $200.

2008 May 21 02:56 PM

[leewardislands:]

I think it is a shame that Apple has become so heavily entwined with AT&T. If they would just offer these phones unlocked, and make them available to everybody in countries where they don't have a 'back-door deal' set up, they would sell a lot more phones. I have one that I paid $750 with an illegal hack program installed, and would pay twice that amount if I could get a legitimate one direct from Apple. I am very surprised that only 3% say they would pay more than $500. I think they are asking the wrong people.

2008 May 21 03:04 PM

[samij:]

sounds good, but will it result in profit increase? wouldn't that be just change ipod sales into iphone sales? further, att is unlikely to start subsidizing iphone with the current revenue sharing model, so those fat profits will be gone.

on the other hand, the phone sales seem to be down in the us due the economic uncertainty, especially in the high end segment, so this might be what apple has to do to keep the momentum going.

2008 May 21 03:26 PM

[FreeRange:]

The biggest problem is that no one knows what a high-end phone is worth anymore because the carriers are whores - they discount the other guys product instead of their own - THEY are the commodity, not the iphone/smartphones. Why not discount your services if someone buys an iPhone???? Instead of ruining the handset market? Further, the iPhone is the world's most sophisticated handheld computer that has a phone function and should be valued as such. Don't let the carriers destroy the perceived / actual value of this device! Protect the brand! In the long term, this is what is best for the brand and shareholders.

2008 May 21 03:31 PM

[KenC:]

This rumor was started by Scott Moritz. He is a well-known fudster, who has tried to drive down Apple sales and its stock price before. His goal is to get people to delay purchases, you know, the Osborne effect, in order to drive down the stock. He uses his relationship with TheStreet.com and Jim Cramer to accomplish his goal. Recall that he was the one that made up the story that Apple's goal was to sell 1 million iPhones on its first weekend of sales. Of course, we all know that to be garbage as Apple never shipped 1 million iPhones for first weekend distribution. Nevertheless Scott Moritz never explained nor apologized for his FUD.

2008 May 21 03:38 PM

[best.deception:]

I think the bar graph you have is null and void. This data was before the iphone became iconic. I bet you would see the same results if you asked people how much they would pay for an ipod before it was released. People only understand how great the iphone is after it was released, not before, so now they can save the $200 they would spend on an ipod, and add that to their purchase of an iphone.

2008 May 21 03:48 PM

[drewys:]

Apple (while growth is quickly accelerating) is still way behind Rim's BB. I'd like to see Apple at or near BB's customer base in order to achieve more of a critical mass base. For this reason, Apple should make every attempt to get prices down to about $179 where the majority of smart phone users would willfully plunk down cash to experience the glory and efficiency of the internet, email, phone, and, oh yes...the Mac OS. Because we all know what's next. Mac's acceleration (of computer/entertainment producst) into Education and Consumer offices and living rooms!

2008 May 21 04:29 PM

[surfnyc:]

When the 3G iPhone comes out,.... what will I do with my current iPhone?

2008 May 21 05:05 PM

[chanat:]

I completely agree with KenC on his remarks regarding Scott Moritz. Many times, Moritz appears to SPOAF-State Personal Opinion As Fact. I don't know his motives, but KenC's TheStreet/Cramer connection to Moritz appears plausible. Trying not to drift off into emotion and non-facts, but when I see Moritz interviewed on video clips about AAPL, he does seem to be biased against and slightly arrogant.

2008 May 21 06:11 PM

[chanat:]

I completely agree with KenC on his remarks regarding Scott Moritz. Many times, Moritz appears to SPOAF-State Personal Opinion As Fact. I don't know his motives, but KenC's TheStreet/Cramer connection to Moritz appears plausible. Trying not to drift off into emotion and non-facts, but when I see Moritz interviewed on video clips about AAPL, he does seem to be biased against and slightly arrogant.

2008 May 21 06:12 PM

[gofer:]

Much hoopla about about a phone that should have gone 3G a long time ago.

2008 May 21 07:11 PM

[wallawallab...:]

Moritz doesn't have a scintilla of credibility among thinking adults. I'm surprised Seeking A entertains this. Perhaps you're in the cabal with Cramer, Savitz et al.

2008 May 21 07:30 PM

[wallawallab...:]

Anyone interested in how Cramer/Moritz have previously manipulated stocks (Apple, coincidentally, regarding the iPhone and Verizon) should go to basherbusters.com, or read the site, roughlydrafted.com. Most informative!

2008 May 21 07:33 PM

[bestdeception:]

Gofer, why should it have been 3G a long time ago when most domestic markets don't have 3G capabilities until the last couple months? And those markets are still few and far between.

2008 May 21 09:33 PM

[jmmx:]

Note
-
1 - this survey was PRE-RELEASE things have changed since then.

2- Even in the survey, those willing to pay $399 or higher we 14%.
iPhone now has some 600 million potential customer base. 14% of that = 84 million. After we have sold 84 million iPhones, I will be ready to lower the price a bit. :D

2008 May 21 10:42 PM

[aapladay:]

I see no problem with it being subsidized. People can only get that price if they sign up for the lucrative contracte Apple wants. ATT subsidizes the iPhone, not Apple. That should drastically increase sales and Apples margins since they get the contract. Oh, and dont even think of crossing ATT by cancelling your contract and not paying the penalty! They are mean bastards! I had friends who worked for them, trust me.
But is this whole subsidy thing just a rumor then?

2008 May 22 12:44 AM

[AdamC:]

Here is the lowdown on Cramer and the street.com - a lengthy read

www.deepcapture.com/

2008 May 22 12:54 AM

[Zoltan L. K...:]

My guess is,that AAPL will enter the lower price segments through product diversification, that means somewhat stripped down phones.

2008 May 22 01:35 AM

[wallawallab...:]

Ultimately, I wouldn't be surprised to learn of Cramer and company as being part of organized crime.

Certainly, racketeering at the least.

2008 May 22 04:52 AM

[wallawallab...:]

In a similar vein, Gary Krakow of thestreet.com is setting up the iPhone for disappointment. On the website, he's currently soliciting a laundry list of features/fixes that should be added to the iPhone from readers.

A prediction: when the iPhone doesn't meet these undue expectations (coincidentally around the June's Developers conference and the alleged release of the 3g, I'll wager) he'll down the phone, and Apple for a tidy return on the stock dip.

I never hear them saying that the RIMM phone needs this or that feature? Are BlackBerries perfect? Who does thestreet.com think they are anyway, CNET?

Kind of bizarre, no?

Krakow's also obviously been drooling over the prospect of a iPhone 'killer' and posting salutary articles about every knockoff that comes out. What is this about?

Why is thestreet involved in, of all things, cellphones anyway? Why not some other arbitrary item, say, office shredders, whatever.

Am I alone on picking up on this? Am I paranoid?

Meanwhile the iPhone has a 70% favorability rating in consumer tests.

Why the scrutiny of the iPhone? Probably because they see the iPhone as an achilles heel for Apple. They need some handy means of collecting on short selling. They know the Mac PC's are unassailable. They may think there's a window of vulnerability on the iPhone.

The whole ploy is a bit too transparent for my likings.

Read about the methodology employed at basherbusters.com and roughlydrafted.com. They have video of Cramer explaining the very modus operandi they use.

2008 May 22 05:28 AM

[Gary Rybold:]

Why a $200 subsidy? Doesn't a $100 subsidy seem more likely?

Basic law of business - when there is large demand, never lower the price, never offer rebates. When the 3G iPhone comes out, there will be a mass of demand. There will be no rebates. But, after a few months, as demand decreases, a small rebate will be offered. Later, a larger rebate will be offered. THIS HAPPENS WITH ALL OTHER CELL PHONES RIGHT NOW!

Originally, I was thinking the old iPhone would go to $199, and the new 3G phone would be $399 and $499 (depending on memory). But, since Apple appears to have stopped production on the old phone (zero supply), I would say the 3G phone will be the only phone. At first, $399 and no subsidy. Later, AT&T will offer a rebate (this way, no one gets pissed off with Apple. Heck, they could offer a joint rebate, but have it provided by AT&T, and the public would never know).

2008 May 22 07:11 AM

[tom1234:]

aapl has entered the retail store sales business--with the sales results per sq.ft no other retailer has ever reached --in this economy when commercial real estate is down --what a MIDAS TOUCH---

2008 May 22 09:02 AM

[entmd:]

You all realize that the iPhone is not actually a phone but a computer, internet device, Google maps device, iPod, video iPod, etc, that can make calls. Why would you expect it to be half the cost of an iPod Touch????? To all you cheap asses, enjoy playing tetris on your free phone.

2008 May 22 12:44 PM

[icanpress:]

I think Apple will go the way of the iPod - introduce multiple products with different price points, let the consumer decide what they need

2008 May 22 05:09 PM

[adan:]

subsidy is no rumor

my wife got a hard copy ad in the mail yesterday she salivated over

and to answer your question re if the subsidy would apple's ticket to mainstream - yes :-)

and, the bigger the subsidy, the bigger the ticket :-)

2008 May 22 05:20 PM

[Manhook:]

I was an exec at Apple when the decision was made not to license the Mac OS. The mkt share war was lost on that day. Here's an opportunity to flood the mkt w/the iPhone platform. Another razor blade model to feed Apple's econ system and AT&Ts data revenues. A win-win that both cos are too smart to pass up.

2008 May 23 01:36 PM