iPhone: Wall Street Analysts Question If Pricing Model Is a Drawback

Thursday, 24 Apr 2014 10:43 AM

By Nick Sanchez

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Wall Street analysts say the iPhone may be in danger of losing its popularity as more wireless carriers like T-Mobile and AT&T stop subsidizing the full cost of the handsets.

The Wall Street Journal reported that T-Mobile no longer sells phones below cost. In the past, the company would sell the iPhone for a fraction of its cost while locking customers into a two-year contract in hopes of recouping the subsidy over time — something its rivals still do.

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This means that those seeking an iPhone through T-Mobile now pay at least $649, the full cost of the most basic 16GB iPhone model.

"The U.S. is among the iPhone's strongest markets, in large part because of subsidies," the Journal reported. "But it is already showing signs of strain amid strong competition and slowing adoption rates for smartphones as the market becomes more saturated."

AT&T is also testing the un-subsidized model, and reports that it sold 15 percent of its phones un-subsidized in the fourth quarter of last year. That percentage is expected to rise to 35 percent in 2014.

Last month, AT&T Chief Executive Randall Stephenson said at a conference, "We actually think that the industry is at a place where you can actually see line of sight to the subsidy equation just fundamentally changing in a very short period of time."

Rival Verizon has been much more skeptical in approaching the new business models, however.

"We believe that the subsidy model is an extremely good model," Verizon Chief Financial Officer Fran Shammo said last month. "It has done wonders for us in this industry. So . . . to abandon that I think is a mistake."

Apple may not be the only one to suffer from the new model, as analysts point out that its chief competitor, Samsung, charges roughly $600 for its new Galaxy S5.

Generally speaking, customers have always paid the full cost of their phones — just in a different way. In the past, customers would make what was essentially a down payment on their new handset — $100 or $200 — and pay off the remaining cost of the hardware through their monthly bill, which usually had the expense bundled in.

Seeing the full cost upfront will likely drive up demand for cheaper phones, however, which could slow the pace of innovation for device makers in a market where each new generation of iPhone is more difficult to differentiate from the last. The prevalence of the full-cost model might also discourage more frequent phone upgrades, which has already started to drift downward in recent years.

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