Why carriers put up with high iPhone subsidy

By , May 21, 2012

I already opined on crazypants analysts predicting carriers would put the iPhone in its place because they reason Apple wields far too much power in the wireless industry.

Newsflash: we’ve been hearing for years that disgruntled carriers will drop iPhone subsidies and hurt Apple’s bottom line in the process.

Surprisingly enough, fear of customer-retention rates spiking if they did has so far outweighed concerns of their profits taking a short-term hit because fewer people could afford a non-subsidized iPhone.

The fact of the matter is, it’s never been about Apple or even industry politics for that matter. This is about a sought-after device with the proven ability to bring in new customers.

It’s simple: make the iPhone more pricier and expect customers to flee to another network that offers it subsidized…

Enter BMO Capital analyst Keith Bachmanm (via AllThingsD) who gets the kudos for stating the obvious:

We continue to believe carriers would lower iPhone subsidies if they collectively felt that competing devices would drive the same economics as iPhones.

So, the iPhone economics.

He’s talking about the iPhone’s ability to drive sales at the expense of competitors, as expressed by churn rate.

Sometimes called attrition rate, churn rate refers to the proportion of contractual customers or subscribers who leave a supplier during a given time period.

The lower the churn rate, the better for a carrier.

The iPhone used to be an AT&T exclusive in the United States and people were willing to break their contract and jump ship just to get the device, thereby significantly reducing AT&T’s churn rate.

Combined with industry-leading user satisfaction, AT&T’s iPhone customers were far less likely to switch to another carrier upon expiration of their contract. In fact, the vast majority were willing to put up with dropped calls, sluggish data rates and poor customer service just to be able to upgrade to the latest subsidized iPhone model.

It’s estimated that the iPhone carries some of the heftiest subsidies in the industry said to be about $200 higher than other manufacturers.

Clearly, the iPhone is not for everyone.

Look no further than Sprint Nextel.

The carrier coughed up $15.5 billion to land the iPhone, risking bankruptcy in the process.

Sprint CEO Dan Hesse was even forced to agree to a $3.25 million pay cut because shareholders were unhappy with him betting the farm on the expensive Apple deal.

Of course, market dynamics changed when the iPhone landed on the Verizon network and especially now that the handset is offered through a total of thirteen U.S. carriers.

Even if the carriers wanted change the subsidy terms, they can’t due to the exclusivity terms Apple put in their contracts.

Apple’s multiyear agreements with its carrier partners very likely prevent them from changing iPhone subsidy pricing. These deals are said to have most-favored-nation clauses, so that any reduction in subsidy offered to one carrier would have to be offered to the others.

And with Verizon and Sprint both newly locked into their contracts for some time, Apple has no cause whatsoever to even entertain the idea of a lower iPhone subsdidy.

Taking it all in, an iPhone customer is more profitable than an average smartphone subscriber, is more loyal and in it for the long term and less willing to change carrier to get whatever iPhone-killer others are offering.

Why?

Because five years later, we’re still waiting for that one phone to beat the iPhone.

Make sense?

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  • http://twitter.com/rashidkhan Rashid Khan

    yawn!

  • Anonymous

    “Because five years later, we’re still waiting for that one phone to beat the iPhone”

    WTF does that mean? Virtually every single writer on here and similar blogs are fanboys and would never admit a phone was better but then that’s the same for every group of fanboys, no matter the subject. The fact is that you’re still waiting but you’re a die hard Apple fan so nothing, in your opinion, would beat it yet for the millions of users of other handsets, i’m sure they think their device is way better than the iPhone and no doubt it is, to them and for their needs.

    See what annoys me and what you guys don’t comprehend is that the iPhone is the best in your opinion and just because you think the sun shines out of Apple’s anoosh, doesn’t mean it’s right. The people who use, for instance, the Galaxy S II or The new One X would tell you that’s the best phone ever and laugh at your iPhone … You know why that is? Choice !! What suits one person and what’s the best to one person doesn’t make it applicable for the whole world which is something Apple fanboys seem to disregard completely.

    • http://twitter.com/klouud Timothy Polumbo

      Sorry man, its just fact. Yes Android sells more “total units” but there is no single smart phone in the world that sells more units than the iPhone. The 4S broke all records on sales and the Apple AppStore brings in the most business. Its not fanboyism, its just facts.

      Android is a solid platform and has many strengths that iOS has yet to exhibit. But the Android business strategy is to flood the market with as many handsets as possible and hopefully one or two will stick – the problem is that the consumer sees these devices as junk phones because what is gold today is replaced by 2-3 better phones in a couple of months. What I am talking about is what is called “perceived value” and Android is pretty much taking the same route as the PC – you get a race to the bottom in terms of quality and price due to high volumes of devices constantly being released an almost 0 perceived value from the customer.

      • Anonymous

        Well said. Everyone with a 1/4 brain can see all the carriers flooding the market with cheap android phones bUt at the end of their 2 year contract, how many will stay with them. We are just seeing this so in 1 year or so we will see android go down or balance out as many people choose the iPhone or widows to escape the shitting crap they had to endure. Seen it many times. That is why version pushes android more cause they make more money of you, the customer.

      • http://twitter.com/Chindavon Chindavon

        You’re right Timothy. The Android plan is to throw mud at the ceiling in hopes that one or two will stick. That just tells me that they rush these smartphones out just for the sake of getting out into the market. Where’s the care, and innovation here? I’ve held many different types of smartphones, and for the most part, feel too plasticky, lightweight, and unsatisfying to the touch. BIGGER SCREEN! Yawwwwn. I want my phone to feel like a Ferrari when I take it for a test drive. None of this Geo Metro crap.

    • http://twitter.com/klouud Timothy Polumbo

      Sorry man, its just fact. Yes Android sells more “total units” but there is no single smart phone in the world that sells more units than the iPhone. The 4S broke all records on sales and the Apple AppStore brings in the most business. Its not fanboyism, its just facts.

      Android is a solid platform and has many strengths that iOS has yet to exhibit. But the Android business strategy is to flood the market with as many handsets as possible and hopefully one or two will stick – the problem is that the consumer sees these devices as junk phones because what is gold today is replaced by 2-3 better phones in a couple of months. What I am talking about is what is called “perceived value” and Android is pretty much taking the same route as the PC – you get a race to the bottom in terms of quality and price due to high volumes of devices constantly being released an almost 0 perceived value from the customer.

    • http://twitter.com/Davewcoble David

      I work with cell phones everyday of my life. There is a reason why iPhone are the best selling over all on the market. Easy of use, comparability, people always seem 2 bring back there Androids every time there is an update because some app they really love or some widget doesn’t work with the new update or there whole phone feels sluggish after the updates. I’ve taken in 10x as many android phones as returns then I have iPhones. People almost never leave the iOS platform once they get on it mainly because it’s so damn user friendly and has tons more apps. So it’s not about fanboys it’s about a better blend of smooth updates, bigger app market, better performing phone and a much better UI that people can’t stand 2 leave.The list goes on and on of other things ppl love bout it.

      • http://www.iTechBlog.in/ taran

        Exactly….+100 to that…:)
        As i always say…Apple sells nd treat users like family nd give updates till possible…samsung sells and forget..
        If you disagree tell me when ll ICS be coming to S2…after jellybeans….ryt…i got 5.1.1 as soon it was out…fandroids just keep praying for an official release…

    • http://twitter.com/spockerz spockers™

      Can you recommend a good Android forum for me to troll?

  • Sid Panjwani

    You wrote farm instead of firm

  • Anonymous

    I don’t understand the talk about high iPhone subsidies. The full price for a 16gb iPhone 4S $650 which carriers drop to $200 if you sign a contract. That’s the same as most high-end flagship Android devices. Are carriers really thinking that they can sell people cheaper, year-old Android phones (many of which never get updated OS releases) for the same $200?

    Or, is there more to this that I don’t understand?

  • Anonymous

    I see where your coming from, and you have some valid points. Both the Android and iOS are great platforms. As far as hardware goes, Android really excels. They are now uses quad core processors, and some cutting edge touch screen technology not to mention all the other chips on board the higher end devices. Not to mention the customizations capabilities that Android offers. But sadly that’s where it kind of ends. All that great hardware but no software or apps to really back it up. So what is it really good for? Which is why I choose the iOS over android.

    When it really comes down to it, the software really makes the difference. Sure you can mod and Android, for that matter you can jailbreak iOS and nearly do the same things. But what makes the iPhone the top contender for me is:
    1. Polished software/ apps
    2. Software/ developer/ support/ updates
    3. Better security
    4. Reliability
    5. Fluid software execution
    6. Continuity
    7. iOS integration with other devices

    These are just a few examples, and believe me I’ve tried android. But the simple list I listed are weakness I found having an android device. So for me it’s all about the software, and I think Android comes up short on that end. They are getting better, but their not there yet. I could be wrong, but I think that’s why so many people like the iPhone, not mention is simplicity and ease of use.

  • http://profile.yahoo.com/LMF4UB2I4DCOOHNGSBKFQ5ZSLU matt

    while having worked in the phone industry you see way less iphones coming in with an issue, and if you do you do a soft reset and its fixed. id say i see 1 iphone to every 15 android phones that come in for issues.

  • Anonymous

    Androids mission is to wait for the iPhone to drop, study it, and make better phones based on what they compete against. The easy route.. There’s no creativity in that.. That’s why apple is suing google & the rest of the world for various patents & copyright infringements. So while 1 iPhone releases & 10-15 androids release, that next iPhone will destroy anything based on creativity and NOT competition.

  • http://twitter.com/Doliphant Dylan Oliphant

    the ONLY thing really keeping android from completely making iOS and iPhone a thing of the past- is security.

    Being an iPhone owner since the 3GS and now have the 4S- the only thing keeping me with apple is the security. Because many android devices have not only caught up to iPhone many have surpassed it even the iPhone 5. But android is too “windowy” meaning its far too easy to crack into someones phone. If Google could somehow find a way to fix the security issues while maintaining androids open ecosystem then apple would not even be relevant and would off to the wayside…