Contemplating a World without iPhone Subsidies

Even though Apple’s (NASDAQ:AAPL) iPhone has been enormously profitable, accounting for about 75% of smartphone profits in fourth quarter 2011, it has captured a relatively small, 24% share of the smartphone market.

Much of the iPhone’s profitability is attributed to the fact that carriers such as Verizon (NYSE:VZ), AT&T (NYSE:T), and Sprint (NYSE:S) subsidize sales of the device (a 64GB iPhone 4S goes for about $400) so they can attract and retain subscribers who like the phone and will buy two-year service contracts and data plans.

That strategy is working here in the U.S. and in the U.K., but not in places where economic conditions might be more difficult, and where carriers don’t subsidize phone prices or sell service contracts. In many parts of Europe and in most emerging economies, a recent Wall Street Journal story points out, relatively inexpensive phones equipped with Google’s (NASDAQ:GOOG) Android operating system dominate smartphone sales. Many of those phones are manufactured by Samsung (PINK:SSNLF), Motorola (NYSE:MMI), Huawei, and ZTE (PINK:ZTCOY), and sell for less than $200 without a service contract.

Apple is certainly aware of its vulnerability in markets dominated by prepaid carriers that don’t subsidize phone sales. The Journal points out that even the iPhone 3GS—the least expensive iPhone still on the market—sells for $535 without a contract through Greece’s largest wireless carrier, Cosmote Mobile Telecommunications. It’s not yet clear, however, how Apple plans to address the issue. “You can bet that we are into details in every single country in the world trying to learn what we can to adjust, maybe to do better into the future,” company CEO Tim Cook told an investor conference earlier this year.

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