Here's The Truth About The iPhone And Carrier Subsidies

The basic gist: Carriers could end subsidies and that would hurt Apple's iPhone business.

In the U.S., consumers pay $0 to $400 for a new iPhone with a two-year contract at a carrier. The prices vary depending on the phone model.

While a consumer might get an iPhone for free, the carrier is actually covering the cost that drops it to $0. Apple's average selling price for an iPhone is $637. The carriers are covering $400+ of the cost of the phone.

As a result, every so often, we get stories like today's from the Wall Street Journal that the carriers are sick of this nonsense and are ready to pull the plug.

If this happens, then Apple's iPhone business is doomed.

And, sure, if this happens, Apple's iPhone business will probably face a new challenge.

But there's some problems with this story which keeps circulating every few years.

• We don't know the terms of Apple's deals with carriers. The carriers could be contractually obligated to pay these subsidies for years to come.
• Carriers aren't actually paying the subsidies, they're passing the cost on to consumers. If you think carriers are "paying" $450 to Apple out of their own pocket, you're nuts. They pass that onto the consumer by baking in that extra cost in monthly plans.
• If a carrier goes unsubsidized, like T-Mobile, then they cut the price of the the monthly plans. With that extra money the consumer can decide if they want to pay up for an iPhone. T-Mobile also gives you the option to pay for the phone in monthly installments, so it has the same effect as a subsidy.
• Unsubsidized plans can be good for Apple. Without the subsidy, you don't need to sign a two-year contract. Without a contract, you can upgrade your phone as often as you want. One reason Apple's iPhone sales were softer than expected last quarter was North American carriers had tight restrictions on upgrades.
• Apple can come up with an alternative to subsidies. Let's say carriers nuke subsidies, then Apple could start buying phones from consumers for $200-$400 when they get a new one. It can then resell those phones elsewhere in the world. This creates a subsidy-like effect. Apple already has an iPhone buyback program, in fact.
• For all the bluster about subsidies going away, look at what's happening in China. Apple just signed up China Mobile as a partner. China Mobile offers the iPhone for over $800, but it also offers some subsidies to its customers. China Mobile has said subsidies for the iPhone are hurting its profitability. Why is it subsidizing the iPhone? Because smaller carriers were subsidizing the iPhone and stealing China Mobile's customers, according to this Reuters report. In the U.S., it would only take one company sticking with subsidies to win consumers for the other carriers to adjust their behavior.
• Samsung's phones are also expensive. This has less to do with Apple, but it's a reminder that all high-end, top of the line, latest and greatest smartphones cost $600+.

In summation, there's a lot happening here. And, if this is going to happen, don't expect it any time soon for Apple. This gives Apple plenty of time to think about how to change its sales approach if anything happens.

One last point: Apple's iPhone business has already hit a wall. Growth is in single digits and last quarter sales in North America were already down by an estimated 20%. If Apple management isn't actively thinking about to boost sales then something is seriously wrong at the company. Subsidies are a concern, but probably not the biggest. The biggest worry is that the iPhone business is flat overall.