When the president of AT&T (T) said last week that market saturation means it no longer makes sense for wireless carriers carriers to fund a constant consumer upgrade cycle through subsidized phones, you can bet Apple (AAPL) took notice.
Convincing consumers to upgrade a one or two-year old Apple iPhone for a new one is a big part of the AAPL business model … and losing phone subsidies means having to convince customers to pay full price for an unlocked iPhone.
But for a second, let’s ignore what the sticker shock of moving from $99 for a Verizon iPhone on contract to having to fork over at least $549 — the current iPhone 5c price — could do to AAPL. What would the end of subsidized phones mean to you?
Well, if you’re a typical Apple iPhone owner, you upgrade your smartphone every two years. The manufacturer’s suggested retail price (MSRP) of that device doesn’t matter because it’s a subsidized phone, with the carrier picking up the extra.
The Apple iPhone 4 price was $599 in 2010 as an AT&T exclusive at launch — a costly win for AT&T. When Verizon (VZ) finally gained access to Apple’s flagship smartphone, subsidies for a Verizon iPhone were expected to cost the wireless carrier between $3 billion and $5 billion. Last year, the Apple iPhone 5 price was $649 and keeping it at $199 on contract as a subsidized phone was a $10 billion proposition for U.S. wireless carriers.
This policy of offering subsidized phones every two years made sense when carriers were fighting to convince customers to adopt smartphones. But now most of those people have made the move.
It’s bad enough for carriers trying to swallow the bulk of the price of iPhones for sale in their stores today when an iPhone 5s goes for $649. Imagine what happens if Apple boosts the price of next year’s iPhone 6, as has been rumored? You can see why the end of subsidized phones is likely coming.
As a consumer, that would probably result in a significant change in your smartphone upgrade habits, especially when combined with the fact that smartphones are a maturing technology that’s losing its ‘wow’ factor. Instead of paying $199 every one to two years for a new subsidized phone on contract, the future is looking more like the PC world where you pay full price for a new model every five to seven years.
That’s the future. Maybe. If the carriers are able to wean themselves off subsidized phones and the contract lock-in that offers. In the meantime, here are a few suggestions for the best iPhone 5 price along with a few other iPhone deals we were able to dig up.
Walmart’s (WMT) wide selection of carriers includes older model refurbished iPhones and a pre-paid iPhone 5 cost of $549 from T-Mobile (TMUS). Considering an older used iPhone may cost $300 or more, this may seem like a decent price … except for the fact that the unlocked iPhone 5c price at Apple is also $549. In other words, don’t expect bargains on unlocked iPhone pricing.
AAPL offers a full range of factory reconditioned products, but no refurbished iPhone. However carriers often sell them as lower-cost options. An AT&T iPhone 4 that’s been refurbished still commands $400, despite being three years old.
iPhone 4 eBay
eBay (EBAY) sellers offer many smartphones, but the Apple iPhone is still a hot seller for those looking for an alternative to subsidized phones. Depending on auction, expect to pay in the $300 range for an unlocked iPhone 4 in excellent condition.
Best Buy iPhone
Big box electronics retailer Best Buy (BBY) has offerings from all the major carriers and at least 10 choices for a refurbished iPhone (all on contract). However you can currently buy a pre-paid iPhone 4S through Virgin Mobile (VM) for $399.99.
The Bottom Line
The other option of course — and the one that should deeply concern AAPL investors if phone subsidies dry up — are the ‘good enough’ smartphones offered by everyone else. Instead of paying $300 for a three-year old unlocked iPhone, you could skip Apple altogether and save money by instead paying $349 for a brand new, unlocked Google (GOOG) Nexus 5 smartphone.
If you can get over the sticker shock (and assuming carriers don’t jack up the price of their plans), you’re actually better off paying full price for an unlocked iPhone — at least if you’re OK with not upgrading every year. Yes, there’s more cost upfront. But without being locked into a minimum plan for two years, you stand to save hundreds of dollars over that subsidized iPhone — savings that increase the longer you go without upgrading again.
So while the end of subsidized phones may end up being a disaster for AAPL stock, the move is probably better for you as a consumer.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.