by Zach | December 16, 2013 11:30 am
Many smartphone users in the U.S. have become very accustomed to paying $200 or less for the latest and greatest phones. This is because many of America’s telecom giants eat the $300-$400 difference (if not more) between this low price and the actual retail cost, and then slowly get this back thanks to high data cost plans over the next few months and years.
This has become standard among many telecoms, though some smaller providers have tried to break this mold as of late. But based on some recent rumblings in the telecom world, this practice could soon be ending in the U.S. market.
This is especially true if you listened to AT&T (T) CEO Randall Stephenson and a recent talk he gave at an investor presentation in New York City. At the presentation, Stephenson declared that with smartphone penetration already at 75% and fast approaching nearly universal adoption, the current subsidy model doesn’t make sense anymore.
“When you’re growing the business initially, you have to do aggressive device subsidies to get people on the network,” Stephenson said in a CNET article. “But as you approach 90 percent penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can’t afford to subsidize devices like that.”
So if companies like AT&T and Verizon (VZ) become unwilling to subsidize new phones, full retail prices will have to be paid by the consumer. For new Apple (AAPL) iPhones, this could be as much as $849 for the 64 GB version, a price that is probably far too steep for many in the smartphone market.
Due to this, it appears likely that instead of subsidizing the price up front, there might be a push towards financing by the carriers, or more pressure on companies like Apple to offer up cheaper phones.
If the financing model is the preferred route, consumers might not notice much of a difference, though if data and hardware are separated those willing to shell out nearly $1,000 upfront could see reduced data rates.
Personally, I think that carriers will just adopt a financing model, zeroing in on a ‘no-money down’ system. This could actually result in more profits for the telecom giants, though I am a bit more skeptical for how this benefits companies like Apple.
The initial shock might be a little rough though, especially if this puts some downward price pressure on a company that has been focused on keeping ultra high margins for its flagship product. However, the appeal of a ‘free’ or low initial price for an iPhone could certainly sway a number of consumers, so Apple may actually make out better than one might initially suspect.
Will the end of subsidies kill demand for the iPhone and other pricey smartphones? Or will consumers embrace this model, much like what we have seen in other parts of the world?
Let us know in the comments section below!
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