Oh, Canada: Rogers Might Drop The Price Of iPhone Subsidies (Updated)

We don’t know when Apple will release the sixth generation iPhone. When Apples does, however, they will almost certainly offer the new handset at the same price points as past iPhone models. Or maybe not. Since 2008, Apple has been fairly consistent in what they expect carriers to charge customers for their most current iPhone model. At that time, a subsidized iPhone 3G was available starting at $199 with additional models priced at $299 and $399. Three years later, in October, Apple released the iPhone 4S at the same three price points. Canada-based Rogers Communications is looking for ways to wean customers off the expensive subsidies they’ve grown accustomed to receiving in exchange for a locked-in contract, according to The Globe and Mail. As it works now, customers are asked to sign a two- or three-year contract each time they make an iPhone purchase. In exchange, carriers offer the handset at a subsidized rate, which is typically hundreds of dollars less than the actual cost charged by Apple to the carrier. However, Rogers believes there are now two types of smartphone buyers – those that want to pay less upfront just to get a non-standard mobile phone, and those that are willing to pay more if it means larger data plans and shorter contracts. Says Roger’s CEO Nadir Mohamed:

“People want to start out with smaller buckets of data as a way to get into the category. This business hasn’t used segmentation, which is a standard piece of business in other parts [of our business]. You will see that going forward as we start targeting different segments.”

Keep in mind, Mohamed isn’t talking about non-subsidized and unlocked iPhones, which are already available. Rather, he believes the time has come where iPhone subsidizes can drop, without losing customers. What about in the U.S.? None of the major U.S. iPhone carriers have mentioned plans similar to the one being discussed in Canada. However, I would expect they could come in the future. After all, consumers have proven that they are more than willing to stand in line each time a new product is introduced by Apple, regardless of price. Recall, for example, what happened in 2007 when the first iPhone arrived. Then, Apple’s first handset initially sold for a subsidized price of $499 (4GB) or $599 (8GB) and people still stood in line, many for hours at a time. Besides, I'm pretty sure higher upfront costs coupled with larger data plans and shorter contracts would be a perfect fit for many. In fact, with Apple’s cash cow even more popular today than it was five years ago, I am pretty sure iPhone prices could increase modestly without affecting the bottom line. Finally, note that I'm not saying Apple themselves will begin pushing for higher priced iPhones. Actually, Apple will almost surely keep advertising those tried-and-true subsidized prices. Rather, it would be the carriers that would be pushing the higher prices and the additional benefits they would provide. Would you be willing to pay more for your next iPhone if it would mean shorter contracts and/or larger data plans? -- Update Since our original article was posted, we heard back from a Rogers spokesman. They believe The Globe misquoted Mohamed, since the CEO never said Rogers was looking to lower the price of subsidies on iPhones specifically. Here is the entire quote.

HUGO MILLER, BLOOMBERG: Will subsidies keep rising (muffled)? NADIR: I would differentiate between the amount of the subsidy in terms of the absolute dollar versus the rate per device.  We have not seen the rate per device going up. In fact, I would say the mix over time will lead to a lower blended cost for subsidy, quite apart from whether an individual supplier will lower the subsidy or not. It’s a mix issue. One thing we have learned that applies to every business is that the more choice there is, the more likely you’ll see that the prices come down. As a service provider, I just see a lot more choice going forward than we have had in the last ten years. HUGO MILLER, BLOOMBERG: Apple’s numbers yesterday suggest that that kind of growth is not slowing anytime soon. Clearly the subsidies, as much as iPhones are a welcome opportunity, (muffled) is there anything that Rogers or the industry can do to  mitigate those subsidy costs, and how important is having other platforms? NADIR: Great question in terms of subsidy and very timely. One of the things that impacted our quarter in terms of the earnings side of it, is the amount of smartphones we loaded -over 640 thousand activations. iPhones specifically were  up 35% and we all know the model in terms of subsidy. So to answer your question in terms of what we see going forward, a couple of things: One is clearly when we look out ahead at the number of suppliers we now deal with versus lets say even five years ago where essentially, if you go back to where we started were BlackBerry and then iPhone,  if you look out now, we have had the chance to sit with many suppliers, whether it’s Samsung, Sony, HTC,  there is whole group of new suppliers that have tremendous product selection.   For consumers it means much greater choice. For service providers it means having the option to bring way more to the market as opposed to relying on one or two suppliers.  I think part of the answer in terms of the subsidy model is the mix of smartphones that are in the market will change over time. Android clearly is the fastest growing part of that spectrum.  I suspect the others will continue to be strong including Apple.  The mix will factor in because there are different subsidies with different devices and service providers.  The second thing is very much a view that if you look at the history of wireless and where we are today, we have always talked about smartphones as a proxy for getting customers that deliver higher value in terms of using their services more and. In our language, higher ARPU or revenue per customer.  As I look forward it is clear to me.  Understand we are the leaders here, we are at 60% and this is going to be an industry issue.  We just get to these things faster – that’s the benefit of being the industry leader. What we see is that the next ten, 20 points of penetration, almost by definition, will be people who want to start out with buckets of data that will be smaller buckets as a way to get into the category and then grow with usage over time.   When you look at that versus the subsidy you have on the smartphone, what I look at from a service provider POV is to start segmenting the market.   This business of wireless data has not used segmentation. It is a very standard piece of our business in other parts of our business.  You will see that going forward where service providers including ourselves will start targeting different devices for different segments of the market to factor in what we would consider the usage pattern of that individual customer.   I think both will work hand in hand in terms of how the subsidy model evolves.

 

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