Short Apple?

Verizon's decision to stop subsidizing smartphone purchases in exchange for 2-year contract lock-ins is going to be a big change in the industry.  It will be interesting to see what happens to handset prices.  A while back someone I know had a Verizon iphone that they lost.  They were talking about going out and buying a new one to replace it.   I said, "uggh, an $800 hit."  They looked at me like I was crazy.  They said they had paid something like $300 for it.  I pointed out that that was likely with a 2-year contract lock-in, and that a replacement would go full price which can run over $800 depending on which version they had.

They did not believe me.  In fact they were almost indignant that I would suggest such a thing.  And went running off the the Verizon store with every confidence an iPhone 6 plus could be purchased for $200-$300.

This situation has obtained for a decade.  It will be interesting to see what happens to iPhone sales when customers are exposed to something closer to the true price.  Since most iPhones without contract go for more (substantially more in fact) than the laptops I am buying my employees, I can't help but think that iPhone revenues will suffer.  (Of course, the result could be everyone who wants a new iPhone switching to AT&T from Verizon  -- it is not at all clear Verizon's new no-subsidy rates are low enough to be a better net deal than the old rates+subsidy).

I use Verizon because my business operates in the boondocks and Verizon is almost always the last carrier standing when I drive out to our locations.  I wonder if Verizon will now be allowing unlocked phones?  I presume this will be the case -- T-Mobile is the other company that ended phone subsidies and I moved my unlocked Nexus to them.

By the way, the current T-Mobile $50 a month plan allows unlimited data and text when roaming in 120 countries, and $0.20 a minute international calls from any of these countries.  This is even better than you can do with the old method of buying an international sim card and switching when you land.   No other US carrier is even in the ballpark.  You have to pay Verizon $20 a month or so to get them to reduce international roaming text costs to 50 cents each with some paltry amount of data.  For international travelers, there is no other choice even close to T-Mobile among US carriers.

  • NJConservative

    Sprint has unlimited texting and $0.20/min. calls when international roaming. And free data, but only at 2G speeds.

  • IsaacCrawford

    Comparable phones from other brands are about the same price. Apple will probably be fine. Might want to short other manufacturers if you haven't already. I think this is the final nail in the premium android handsets business. Prepare to see an even quicker race to the bottom in the Android world.

  • Jim Collins

    Verizon lost me as a customer when I had them check out a phone that I was having problems with. They said that the phone was fine, the battery was bad. I paid $75 for a new battery on a Tuesday and my phone melted on Thursday. When I went back to them, they said that they would replace the phone if I signed up for a new plan and gave up my unlimited data. I told them where they could put their new phone. My original two year plan had expired the previous year, so I paid off the balance that I had for the month and thought that was it. A few months later I get a letter from a collection company telling me that I owed Verizon $198.00 and they wanted their money. I sent a copy of my "paid in full" receipt and that was that. One other thing about Verizon. I was paying for unlimited data and my phone could be used as a "hot spot" if I paid Verizon $20 for every 2GB of data that went through the "hot spot". So I would be paying twice for the same data.

  • Mr. Generic

    If you can use a Verizon phone in the foreign country. Most of Verizon's phones use CDMA, which has limited usage in other countries. If you look at the Verizon "Global" phones, you'll see that they have GSM support in addition to CDMA and a separate SIM card for GSM networks.

  • Mike

    T-Mobile also charges full price for phones, but have a plan to pay for it over two years, or something like that,so it doesn't hit you all at once...

  • morganovich

    i think that is too simple a way to look at it. the android guys have several advantages as manufacturers. the OS is free and they do not have development costs for most of the software. this gives them a baked in cost advantage vs apple. it's also a faster evolving OS which the customers like. 5 years ago, apple was WAY ahead. today, they lag meaningfully in both hardware and software. this is why their market share has been devastated. apple has to compete against guys that mostly just do hardware and they are now losing on volume and buying power too.

    apple does have some advantages though. they own the apple play store, so they generate big revenues that way. it makes their ecosystem less vibrant as the aps for it are heavily vetted and more limited, but they also get to keep a degree of consistentcy and compatibility you do not see in android.

    ultimately, this is a "cathedral vs the bazaar" contest, and apple seems likely to lose. if ATT cuts subsidies as well, this could start to get very interesting. the high end smart phone space has lived on these subsidies. people are much more sensitive to up front costs than costs spread over time.

  • Clare Steen

    I am also interested to see whether customers will be willing to tack on another $27 to their monthly phone bill to cover their iPhone 6 if they are unwilling to pay full price up-front. The only similar pricing model I'm familiar with is musical instrument rental.

  • Jerry

    Personally, I love buying my phone for full price then paying a substantially reduced rate for monthly service. I bought a iPhone 4s several years ago for around $600, and have been paying $30/month for service ever since (via one of the Sprint MVNOs). As far as I could tell at the time, the best on-contract rate I could get was going to cost me $80/month. So I broke even in cost after a year, and saved about $600 per year thereafter.

    I know paying the up front cost is tough for some people, but it works out to be a great deal for me.

  • N

    An interesting question this leads to is, will this cause the "price" for an off-contract iPhone to come down? Because that $800 is inflated relative to other Apple products. Consider, an Ipad with cellular (and no contract) will cost less than an iPhone 6.

  • McThag

    Verizon is going to do the same thing and offer a payment plan for the phones.

    We're with them because they were the least offensive locally about getting set up (I KNOW!). Pricing what I have now with 4 family phones I go from $270 a month on the 2-year contracts to about $140. Putting the $130 into savings for 24 months buys some pretty nice phones outright, and since we're trending three years before a phone is so worn/outdated it can't keep going we should be sitting pretty well. The trick will be transitioning. When our contract expires, the phones will be two years old and we're going to have just a year to save up for their replacements (on average).

  • ErikTheRed

    You can, but you get murdered with roaming rates. I was on a yacht in French Polynesia earlier this year and I had brought a small satellite uplink with me. As it turned out, there was cellular service on the water just about everywhere we went (good 3G signal, except for some longer distance hops between islands)... but the roaming cost per MB were twice as much as they were to bounce the data off of a geosynchronous satellite 25,000 miles away. Go figure.

    However (and apparently many people don't know this), Verizon will unlock your phone for a few weeks so that you can use a local SIM in whatever country you visit, and clever people can forward their calls to a this number (or if you want to be really efficient, forward your US cell number to a US VoIP number, then forward that to the international cell number). I'll probably play that game next time I take an international trip to someplace that doesn't have WiFi everywhere (I'm more concerned about data than I am voice). Sadly, I'm still in the space where I can afford to travel well, but can't afford to ignore my businesses for a week or three.

  • ErikTheRed

    Yeah, you can't beat T-Mobile's plans for International traveling. The only downside is that when you're in the US you have to use their execrable network. It's fine if you're not a big data consumer, but if you actually use a lot of data they're pretty much the worst. Verizon is the least of all evils for heavy data users right now. If Sprint gets their network sorted with Softbank's money (which is currently what's happening), then they have the potential to be amazing. They have a ridiculous amount of spectrum compared to the other guys. I'll hop to them in a heartbeat if they live up to their potential. I wouldn't do business with AT&T if they were the last provider on Earth.

  • slocum

    I think a bigger threat to Apple and all smart phone manufactures in the rapid maturation of the market. Apple has been good at dribbling out missing features gradually to keep the upgrade mill churning, but now that they've finally (finally!) come out with the bigger screens, that bag is about empty. More and more it makes no sense to upgrade until your old phone actually dies. And at the same time, the gap between $200 and $600 phones is closing quickly.

  • Mike Powers

    This...isn't really a new thing. And all the other carriers already do it. They dress it up with names like "New Every Two!" and "Next 24", but what it really amounts to is paying for the phone by installments rather than all at once.

    The kicker is that you used to get a discount on the service for doing it that way. Now, you're not going to get that discount any more.

  • http://vikingvista.blogspot.com/ vikingvista

    I'm already on a full price off contract Verizon plan, even though every 2 years I'm chomping at the bit for a new phone. This was the only way that I could grandfather in my unlimited data plan. It's hard to say if I use enough data to make it cost effective, but there is something comforting about not having to even think about how much data I'm using.

  • John

    On the downside of Android, most manufacturers do not keep up with security updates (and there are boatloads of those), and some networks don't push available updates, so many not-so-new Android handsets have many security vulnerabilities. Many Android app stores are really malware stores. In my work I see a multitude of Android devices "phoning home" to suspicious IP addresses in Russia and Ukraine, but iOS doesn't exhibit that behavior.

    Couple that with the iOS secure enclave and ApplePay, and it appears to me that Apple will own the high margin phone business for quite some time to come.

  • http://vikingvista.blogspot.com/ vikingvista

    I've only played around with iPhones, but never really saw the appeal. I haven't been a fan of Apple products since Windows was at version 3.1.

    I've always used Android, mostly Mototola. However, my latest was a Samsung. I have to say, Samsung appears to be in a class of its own. If I never got a new phone to replace my current Note 3 (and Note 5 is already coming out in a few months), it probably wouldn't bother me. I'll certainly never get another Motorola.

    Interestingly, my family has had good luck with all manner Samsung electronics the last few years. Samsung seemed to have emerged as the Sony brand deteriorated.

    Anyway, all Android phones are definitely not made alike.

  • http://vikingvista.blogspot.com/ vikingvista

    Plus, much like laptops and automobiles, smartphone technology has matured to the point where it takes a lot longer before you feel like you need a new phone.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    My AT&T iPhone 6 does this as well. Jacks up the monthly charge, but didn't shell out $250 up front like last time I upgraded.

  • Dan Wendlick

    Look at what happened when AT&T was forced to unbundle hardware from service. Instead of paying your $3.45 (IIRC) a month to rent your rotary phone, it seemed like overnight you were able to get a phone at K-mart or Radio Shack for $20 cash on the nail. But then instead of one phone, you suddenly ended up with multiple phones per house. What I see happening is the same number of phones being sold, but with the margins being squeezed to the point where the unlocked cost dips to what people are being charged now as the takeaway price with the subsidy.

  • Baelzar

    I knew a mid-level manager at Verizon; he told me years ago that Verizon never wanted to be in the phone business. They don't want to sell phones, don't want to support phones. They're a telecommunications company. Everywhere else in the world - people buy the handset at retail, and switch providers at will. Here...it's all fucked up.

  • jon49

    Hope this doesn't negatively effect the secondary market. Granted I use android so, even the new phones are pretty affordable. I usually buy refurbished. I've been using a service called FreedomPop (which uses Sprint service) that let's me get 500MB for free each month (and minutes/texting but I don't use that). Since I'm on wifi just about 100% of the time and use Grand Central w/ Gizmo5 Google Voice Hangouts all my calls/texting is completely free. I paid $50 for the smart phone, no cost for service, and have a backup T-mobile pre-pay phone ($15/year to keep it active). It seems to work out nicely. For some reason Google can't call foreign phones that somehow end up in the US.

    Apparently Google is coming out with a plan very similar to FreedomPop's but will toggle between Sprint and T-Mobile. Not sure how much longer FreedomPop will be around once Google's service goes prime time.

  • marque2

    I think it is because Apple demanded the lock rage plans in the first place from.AT&T

  • marque2

    I don't have problems with T-mobile data unless I am way in the countryside. Could be your phone.

  • marque2

    The OS isn't exactly "free", they give up store profits to Google. Gotta use Google play for the most part,not Samsung play.

    Apple may have more costs in developing an OS but they get much more back from their app store and music services.

  • offby1

    Google's "Project Fi" (https://fi.google.com/) offers roughly what T-Mobile does, with the benefit of better coverage (by switching to Sprint or WiFi(!) if those would be better), at the same price. The catch? Only available on the Nexus 6 for now.

  • timworstall

    What?

    "the current T-Mobile $50 a month plan allows unlimited data and text when roaming in 120 countries, and $0.20 a minute international calls from any of these countries."

    Unlimited data? Seriously> No extra cost?

    That's cheaper than actually having a normal phone contract here in Europe. I travel across national boundaries a lot and it does seem absurd that it would almost certainly be cheaper to have a US phone contract than any European national one.

  • NJB

    Apple's response to this has been to file a patent for the e-SIM - one that comes hardwired into the phone (Samsung and other manufacturers are on board too). This will cut the phone company out of the handset purchase equation altogether, which probably suits Apple fine, but will have huge ramifications for consumers and phone companies. God knows what this will do to the price of calls (let's face, Apple loves a profit - 12% of global smartphone sales, 98% of global smartphone sale profit.... 'nuff said), or whether all operators will be available on all phones (looking at you again, Apple, you'll have to learn to play better with others). We could find a situation where Verizon and Sprint work on Android phones, and T-Mobile and AT&T work on Apple. It's going to get weird.

    T-Mobile are pretty good for roaming... at the moment. They are doing an amazing job of disrupting the US market (all of these changes, the e-SIM, end of contracts, etc) can be traced back to them. But what they are doing is totally unsustainable and T-Mobile is desperate to be sold. The moment that happens, all the other US operators can relax and go back to what they were doing (ie screwing Joe Public). The last company to express an interest was AT&T. So say AT&T buy them - do you think they'll keep everything in place, or will they start to roll back features, raise a few rates here and there? My money's on the latter, so I'll stick with my trusty Telestial international SIM while I'm roaming for now.

  • morganovich

    marque-

    as samsung is not the one writing aps for the store, it's free to them. it costs an ap publisher to use, but not a phone maker.

    regarding the rest of your point, isn't that what i just said?

    the bottom line for me is that apple is going to really struggle to keep up. they are not fighting A competitor, but a whole industry.

    strange as it sounds, the one i would not rule out is microsoft. surface is really starting to go in the tablet space. they largely own the desktop/business market. they are now the biggest player in business cloud. if they could get solid phone OS integrated and make the whole system really secure and to end and protect my privacy, i'd pay for that. so would many businesses.

    their challenge is the ap store. if they can figure out how to either port aps or attract developers, then they could have a helluva ecosystem.

  • morganovich

    really? as an android user, i have been having the opposite experience. 3 years is the real outer limit on a phone to keep up with the OS and aps. 2 is more likely. i used to keep phones far longer than that pre smartphone. i must have gotten 5 years out of my old nokia 8810. that was a GREAT phone.

  • morganovich

    well, samsung has its issues as well. i have an edge 6s. it took me 5 tries to get one that worked. they all had an accelerometer flaw that would not allow the phone into landscape mode. it would kick in after the first time you used a rapid charger on it. it's now fixed and its and great phone, but the speed of turnaround in the industry is giving everyone fits.

    in general, never buy a phone for the first 6 months of release. i violated this rule and paid heavily.

  • ErikTheRed

    I suspect Apple's agenda with the e-SIM is to let people switch carriers at will - their attitude towards the carriers has always been "more of us and less of you in the customer experience is A Good Thing." They're no longer getting a cut of the phone bill, so why should they care which carrier their customer users? I would imagine that their dream position would be to let a customer log into iTunes, and port their number and their account to whatever carrier they want pretty much on a whim - that would let them get a kickback / incentive system going with the carriers again and actually encourage true competition among the carriers. The phones have been carrier-neutral for awhile now (no longer GSM vs. CDMA) so the only impediment to easy and instantaneous switching has been the physical SIM cards.

  • TM

    Fairly certain the cell companies were selling phones long before Apple came along.

  • marque2

    Yes you are right. I probably regurgitated something i read from an Apple hater, without thinking about it. Indonrecall being under contract in 2000 - long before Apple has a phone.

  • marque2

    Bought my wife her Nexus 5 the day it came out. No issues. I think you just had bad luck, and possibly should consider LG :)

    I am saving up for a G4, but may go for the new LG Nexus 5 which Google will release this year

  • marque2

    Google and Apple arent the one writing the apps either. Apple makes about 30% off of each app sold. Google does the same,but also has an advertising model. They get all this money while providing merely relatively low cost servers to host the app sales. It is so lucrative everyone want in. Amazon has done faiy well with their app store as an example and Samsung, is annoyed with Google for not sharing - and have tried to come sell phones with their home grown Titzen OS, in order to grab sales from an app store.

    I am surprised, I find you are usually more astute about economic models of companies, and industries. But then, what do I know? I am not a wealthy horticulturist,just a goofy software developer.

    As for Apple, they make most of their money selling other peoples apps and music and taking the 30% cut. The could do a Gillet and give the razors away at cost and would still do fine.

    Surface 3/is suppose to be a really nice tablet/skinny laptop. It is still a bit pricy for me however, I just got myself a Dell laptop. Then maybe I a cheapskate.

  • mesocyclone

    That has changed. The latest exploits have finally allowed Google some leverage with the manufacturers and carriers (yes, carriers are also in the way). They will now push out updates much more quickly.

  • John

    Good news -- with all the unpatched devices out there, I was afraid that Android would become as insecure as Windows.

  • JW

    After being savaged by T-Mobile 3 years ago for $800 in undeserved ETF fees (which they refused to negotiate on), I vowed never to have a contract phone ever again (and to never do business with T-Mobile ever again). I've kept that promise, buying only unlocked phones like the Moto G or good condition used phones off of eBay. I'm quite happy with the customer service and coverage I've received from AT&T, after dealing with TMo's paltry phone selection and piss poor customer service and coverage for a decade.

    I had to laugh when barely a year later, TMo dropped ETFs and promised to pay other carriers' ETF fees, for customers to come to them. Fuck. You.

  • ErikTheRed

    Interesting - Sprint just announced their "iPhone Forever" plan, that costs an extra $22 per month but guarantees automatic delivery of a new iPhone as soon as a new model is released (customer must trade in their old one).

    http://appleinsider.com/articles/15/08/17/sprints-new-iphone-forever-plan-charges-monthly-fee-for-automatic-device-upgrades