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 …

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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49 Responses to “iPhone sales could be threatened as subsidized costs become more visible, say analysts”

  1. 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.

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    • 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.

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    • 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.

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    • 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.

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  2. iSRS says:

    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.

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    • Ben Lovejoy says:

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

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      • Tallest Skil says:

        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.

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      • Ben Lovejoy says:

        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.

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      • Tallest Skil says:

        >>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.

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      • Ben Lovejoy says:

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

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      • Tallest Skil says:

        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.

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      • Ben Lovejoy says:

        See above – it’s already started.

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

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      • Mark Choi says:

        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..

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      • “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.

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  3. rogifan says:

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

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  4. cmonmun says:

    “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

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  5. PMZanetti says:

    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.

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  6. 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.

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  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.

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  8. myke2241 says:

    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.

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  9. Chris Lee says:

    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.

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  10. jrox16 says:

    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?

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  11. $207 cost for the 32 GB iPhone 5S to build (according to teardown and component pricing), yet off contract, it’s what, 799$? Yeah, can you say markup? Subsidies suck, but so do device manufacturers marking the hell up out of their stuff.

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    • jrox16 says:

      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.

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  12. rlowhit says:

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

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    • herb02135go says:

      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.

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  13. 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.

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    • herb02135go says:

      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!

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      • ackkwk says:

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

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      • ackkwk says:

        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?

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  14. 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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