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Could Reliance on Subsidies be the iPhone's Undoing?

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In the ever-evolving battle for smartphone supremacy between Apple (AAPL) and Google (GOOG), the clear winner so far has of course been the former, as iPhone sales doubled in the last quarter, helping the Cupertino-based company grab 24% of the smartphone market.
Even with its commanding lead, Apple cannot afford to be complacent. A gaggle of new devices are aiming to cut into the iconic phone’s market share, including Samsung’s Galaxy Beam, HTC’s One, and Nokia’s (NOK) Lumia 610 and 808 PureView featuring a 41 megapixel camera, all of which were revealed at the Mobile World Congress.
One advantage that non-Apple phones have always enjoyed is that they are priced much more competitively compared to iPhones, but this advantage is nullified in countries like the US and UK, where carrier subsidies have brought down the true cost of the phone.
However, as Anton Troianvoski of the Wall Street Journal notes, the competitive advantage Android phones have that is erased by carrier subsidies here has been magnified in parts of Europe, where economic strife and a practice of no subsidies means consumers are turning to cheaper Android alternatives.
In Portugal, for example, the Journal notes, the cheapest iPhone, an 8GB iPhone 4, retails for $680 at Vodafone, whereas an Android phone goes for as low as $106.
Similarly, the top-selling smartphone of 2011 for Greece’s biggest wireless carrier, Cosmote Mobile, was Samsung’s Galaxy Mini, which sold for $188 without a contract. “In this economic situation, we had to push the low-end smartphone,” Mr. Koutsonas told the Journal.
Without carriers underwriting a big chunk of the cost of iPhones, last year, Apple held only 5% and 9% of the smartphone market in Greece and Portugal, respectively.
The trend for the foreseeable future is that smartphones will get cheaper and cheaper. Based on a study by Informa Telecoms and Media, a research firm in London, by 2016, over 50% of smartphones sold will retail below $300. The share of those priced at less than $200 is expected to jump nearly fivefold from 5% now to 24% in the same time period.
The big question mark for Apple then is whether or not carriers worldwide will continue to subsidize expensive phones such as the iPhone in order to attract customers – Sprint, for example, is expected to make a profit only in 2015 after acquiring the iPhone last year, even though it did gain 161,000 total net customers last quarter thanks in large part to the Apple bestseller.
Besides carriers who might be taking a hit, Android subscribers on iPhone subsidizers like, say, AT&T (T) are also affected. The strategy of AT&T and other carriers is of course to earn back the $400 or so it subsidizes for each iPhone through the 2-year contract with higher monthly charges. However, another user who bought a lower-end smartphone, who did not get to enjoy the iPhone subsidy, will still have to pay the same inflated monthly fees in a 2-year contract.
Ultimately, Apple’s strategy of premium prices for premium products has proven to be ridiculously successful – the iPad 2’s $500 price tag hasn’t exactly hurt its sales – so there really isn’t a need for Apple to insist on employing the carrier subsidy model. If US carriers ever adopt the European model of not tethering the phone price to a contract, it will be a better test of whether customers will be willing to be pay the premium for the product (Chances are that they will be); it will provide lower-cost challengers, like the much-maligned blackberry from Research In Motion (RIMM), a fair crack at the market; and it will ensure no customer is unwittingly subsidizing the cost of another’s smartphone.
(See also: Apple's iPhone 5 Launching Later Than Expected?)

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