As phone subsidies fade, Apple’s iPhone sales could be hurt

“U.S. wireless carriers are making unexpectedly fast progress moving their customers away from subsidized phones, a shift that could put further pressure on sales of expensive devices like the iPhone,” Thomas Gryta reports for The New York Times. “Apple Inc. charges more for its phones than many companies charge for low-end laptops. Until recently, American subscribers have been insulated from the sticker shock by carriers that subsidized hundreds of dollars of the cost with hopes of recovering it via two-year service contracts.”

“Increasingly, though, carriers are moving toward a model where customers pay full cost for their phones, typically under installment plans. Smaller rival T-Mobile US Inc. sells all of its smartphones that way,” Gryta reports. “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.”

“The U.S. is among the iPhone’s strongest markets, in large part because of subsidies. But it is already showing signs of strain amid strong competition and slowing adoption rates for smartphones as the market becomes more saturated,” Gryta reports. “The fading of subsidies adds more pressure on a device that starts at $649 for the latest-model iPhone 5s.”

“The iPhone makes up the majority of smartphones on AT&T’s network, but the focus on price could also hurt other device makers that make high-end phones. Samsung Electronics Co. recently launched the Galaxy S5, which sells for about $600 or more without a subsidy,” Gryta reports. “In reality, subscribers are paying the full price of their phones whether they are subsidized or not. Under the subsidy model, a buyer pays part of the price up front — say $200 — then pays off the rest via a what is essentially a charge bundled into their monthly bill. Under the no-subsidy model, those charges are explicit. Still, just knowing the cost of the phone could give cheaper models a boost.”

Read more in the full article here.

MacDailyNews Take: With Apple, as usual, you get what you pay for, the best smartphone – and the only 64-bit smartphone – on the market.

Yes, it takes a real genius to “save” a whopping $49 and screw him/herself with a piece of plastic crap from Samsung.

[Thanks to MacDailyNews Readers “Fred Mertz” and “Edward W.” for the heads up.]

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22 Comments

  1. Why wouldn’t Apple just sell the phones on a contract like some of the telecoms are doing? If any company can afford to do that Apple can with such huge cash stash. Apple already has a huge bank via iTunes so looks likely to me. Since iPhones last longer the contracts could be longer thus cheaper per month. Just sayin’

    1. China Mobe is bigger than AT&T, Verizon and Sprint and their profits were off this morning by more than 9% because of the heavy iPhone sales. Yes. I smell FUD too.

      1. and yet China Mobile might have kept a number of customers from going to their competitiors… because of the iPhone…

        So, I guess China Mobile picked customer over paying more for iPhones…

        9% is a huge number if it involves China Mobile.

  2. MDN comments exactly.

    I think the optimum word in the title is “could”. Yeah, and Apple coming out with a larger screen phone “could” take 50% of the fat fingered Android market away from several manufacturers. Mainly Samsung!

  3. I wouldn’t worry about that. If none of the phones are subsidized, as far as phone sales go, it will be the same. The prices will simply be twice what they are when they’re subsidized. In a way, this could be a good thing. It could result in carriers lowering their rates as a result of not subsidizing phones.

    1. There is absolutely no perceived change. With T-Mobile, you pay $200 upfront, just like with Verizon, get your iPhone, and your our monthly bill is roughly the same as Verizon’s (actually, quite a bit lower).

      The major difference is that, once your phone is paid off, your monthly bill automatically drops down. With the old model, it doesn’t, so once your two-year contract expires, and you don’t get a new phone, you are donating money to your carrier. This I never understood — I know several people who are proud of the fact that they are out of contract, on month-to-month (“I can leave whenever I please!”), meanwhile not leaving anywhere, but still paying the full monthly price, which includes subsidy, for a phone that has long been paid off.

  4. The writer is clueless. The net result of this shift is lower total payments by the consumer, therefore greater likelihood of getting a more expensive phone than before. Let me explain.

    Under the old model, you were contractually obligated to pay two years worth of cellphone service in order to get a subsidised phone. The usual subsidy for iPhone and similar devices was around $22 per month.

    Under the new model, you put a downpayment of $200 for your phone, and the rest is financed at no interest, with monthly installments of about $22.

    The main difference is in taxes. with both plans, you pay some $480 towards your phone. However, under the original model, those payments are bundled together with your wireless service, which is taxed quite highly; in some states over 20%. Meanwhile, under the new model, these payments represent interest-free loan installments and are NOT taxed (You do pay retail tax for that phone either way).

    The difference for the iPhone can be almost $100 in some states with high mobile service tax.

    So, Mr. Gryta, there will be NO sticker shock, and the new model may even be more appealing, if the carriers decide to pass the difference onto the consumers (as T-Mobile is doing).

    About the only reason I can see for a few people thinking twice with the new model is that before, everybody believed the purchase price was $200 (they simply never saw the actual retail price with the subsidy model). Now that they see that the iPhone actually costs $650, some may think twice before putting down the $200 in order to get one.

    1. Exactly. The net change to the consumer is zero. In some cases this can be a positive – phone is kept past the upgrade eligibility.

      The author acknowledges this making this a rather pointless article.
      “In reality, subscribers are paying the full price of their phones whether they are subsidized or not. Under the subsidy model, a buyer pays part of the price up front — say $200 — then pays off the rest via a what is essentially a charge bundled into their monthly bill. Under the no-subsidy model, those charges are explicit.

  5. Samsung- never has been a consideration for me. Friends and relatives of mine who should know better think they’re cool for buying Apple “alternatives” like Zunes and Androids. I’m too polite to tell them what I think about that. They rebel against what’s best for them?

  6. Surprisingly, it’s actually cheaper in the long run to buy the phone outright. Especially if you plan to keep it for longer than 2 years.

    My main concern is that the carriers should reduce there contract rates when the cost of the phone is not in play. When my contract ends, I will be moving to a carrier that offers me a lower monthly bill because I already own my phone.

    1. Actually, the cheapest way is to buy it in installments. T-Mobile lead the way, and now others seem to be following.

      Your monthly mobile subscription is much cheaper than before. If you want a new phone with that, you can pay an up-front downpayment ($200 for the iPhone, $0 for some cheaper Galaxy devices) and the rest you pay over 24 interest-free installments. This is obviously cheaper than buying a phone outright (i.e. paying for the whole thing upfront). When they offer interest-free loan, it is always cheaper than paying upfront.

      When the phone is paid off, the monthly installment goes away and your monthly bill goes down to just the service.

    2. Yeah, it is. Although I think that’s mostly with carriers like T-Mobile, which charge less than Verizon and AT&T. Verizon and AT&T on the other hand have monthly fees which don’t change depending on whether or not you have paid off your phone.

    1. Seven years ago, this would have made sense. There is no point today. After T-Mobile started offering interest-free loans for phones last year, others are apparently following this year, so there is really no advantage for Apple offering this (although you CAN use Apple credit card to pay over 12 – 18 months with no interest for certain things).

  7. What annoys me the most in this article is the premise that the carriers are somehow subsidising (in the actual meaning of the word, in other words, discounting the price below cost) the phones, “in hope of recovering the subsidy” over the period of contract.

    There is no hope here; the contract REQUIRES you to pay it off by sticking to it for two years. If you don’t you pay Early Termination Fee, which is usually higher than the remaining value of the phone. This is NOT A SUBSIDY. This is just a deferred payment, or installment plan; nothing else.

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