While carriers would love to do away or reduce the high subsidies they pay on Apple’s iPhone, the practice isn’t going away anytime soon, according to All Things Digital.
According to today’s report, there are a number of reasons carriers can’t end or replace the practice of paying subsidies. For one, they are contractually obligated to keep them. Specifically, Apple includes a “most favored nation” clause in each carrier contract. This means that if one carrier were to seek a lower subsidy, all carriers would have to follow suit.
However, since Verizon and Sprint have only recently become iPhone vendors, “Apple has no cause whatsoever to even entertain the idea of a lower iPhone subsidy.”
In addition, while reducing or eliminating subsidies would help a carrier’s bottom line (up front, at least), most are worried about what would happen to their retention rates if such a move would happen. A lower subsidy would make it easier for customers to move back and forth between carriers.
Finally, Apple’s next iPhone is almost certainly going to launch with 4G/LTE capabilities, which “will inspire a strong surge of upgrades late in the year.” In other words, now wouldn’t be a perfect time to change the subsidy program.
According to BMO Capital’s Keith Bachman:
“We continue to believe carriers would lower iPhone subsidies if they collectively felt that competing devices would drive the same economics as iPhones.
How subsidies work
When the sixth-generation iPhone is announced later this year, Apple will almost certainly release three different models priced at $199, $299, and $399. These price points, which have been consistent since the iPhone 3G launched in 2008, are subsidized prices.
For example, while you must pay $199 for a 16GB iPhone 4S, Apple charges carriers considerably more per handset. As such, carriers require one- or two-year contracts during which time they recover their original investment.
The bottom line: Subsidized prices will remain as long as Apple demands them. And this demand would only go away if the iPhone became less popular.
Would you pay more for your next iPhone upfront if it would mean a shorter contract?
Source: All Things Digital