Do subsidies artificially inflate smartphone full prices?

[bniu]

It's no secret most of the general public is quite ignorant that a 16GB iPhone 5S' full price is $650, since all they really see is $199.

So do cell phone subsidies actually hurt us by keeping the full price artificially high since carriers market the iPhones starting at $199?

And does NEXT also basically serve to keep full prices artificially inflated as well since most of the public sees the monthly payments and thinks "no big deal" but balks at the full price?

 

[960design]

I don't believe the iPhone actual pricing is artificially high. It costs about $200US to build an iPhone. Add in marketing, shipping, R&D and it's a bit more. Old school selling states that you will become rich if you can sell a product for three times it's cost. If you cannot get three times the value, then the product isn't worth selling. There's a whole lot to those last two statements the casual reader will miss or disagree with. Apple has done the work and deserves a fair price.

 

[nnacrumors]

I would say the main thing keeping smartphone prices high is the fact that people are willing to pay high monthly prices for cell phone service.

If they were to say "WOAH... $70/month is way too much just for having a smartphone" then you would have more and more people go the prepaid route to lower their monthly costs.

This in turn would force the customers to buy their own smartphones at full MSRP, which would shrink overall sales since $650 upfront is a tough sell for customers.

Once overall sales started to shrink Apple would be forced to come out with lower cost phones, thereby increasing sales but reducing their margins or by using cheaper materials (i.e. 5c plastic case) in order to try and maximize profits.

 

[Menel]

It's no secret most of the general public is quite ignorant that a 16GB iPhone 5S' full price is $650, since all they really see is $199.

So do cell phone subsidies actually hurt us by keeping the full price artificially high since carriers market the iPhones starting at $199?

And does NEXT also basically serve to keep full prices artificially inflated as well since most of the public sees the monthly payments and thinks "no big deal" but balks at the full price?

I used to imagine a whole lot of cellular related royalties that inflated the costs.

But then Moto G and E......

I think you may be right.

 

[jtaylor673]

Agree with the other poster. Subsidies artificially inflate the monthly subscription cost. The people with a paid phone subsidize those on contract. Think about it.

 

[Crichton333]

It's no secret most of the general public is quite ignorant that a 16GB iPhone 5S' full price is $650, since all they really see is $199.

A bigger punch in the face is that I paid $650 for a Nokia 3310 about 14 years ago. That thing could only make phonecalls and send messages.

 

[617aircav]

Agree with the other poster. Subsidies artificially inflate the monthly subscription cost. The people with a paid phone subsidize those on contract. Think about it.

please explain how they do?

 

[iolinux333]

Of course they do. Zero down loans on cars do the same thing with automobiles. The MotoG/E are changing everything though.

 

[I7guy]

Of course they do. Zero down loans on cars do the same thing with automobiles. The MotoG/E are changing everything though.

So you think zero down car loans inflate the MSRP of an automobile? Interesting.

As far as android goes, it's changing everything if you want a moto g, if you want an iPhone you have to pay the going rate. Cnet says: "the price you want, but not the power you crave", so it's a case of pay less, get less.

 

[Menel]

So you think zero down car loans inflate the MSRP of an automobile? Interesting.

As far as android goes, it's changing everything if you want a moto g, if you want an iPhone you have to pay the going rate. Cnet says: "the price you want, but not the power you crave", so it's a case of pay less, get less.

Yes, but is it proportionsl? Maybe, Im asking.

 

[iolinux333]

Yes, but is it proportionsl? Maybe, Im asking.

No it's not proportional it follows some curve I could have told you the name of back in the day when I was taking a few economics courses. Probably any Econ 101 textbook would have a picture of the curve.

 

[I7guy]

Yes, but is it proportionsl? Maybe, Im asking.

I personally don't care if an iPhone is three times as expensive as a moto g. To me an iPhone is worth the price. The laws of diminishing returns do not apply IMO, in this case.

 

[rui no onna]

It's no secret most of the general public is quite ignorant that a 16GB iPhone 5S' full price is $650, since all they really see is $199.

So do cell phone subsidies actually hurt us by keeping the full price artificially high since carriers market the iPhones starting at $199?

And does NEXT also basically serve to keep full prices artificially inflated as well since most of the public sees the monthly payments and thinks "no big deal" but balks at the full price?

Look at it this way, before the subsidy model was introduced, Apple released the original iPhone 4GB at $499 and 8GB at $599. Just a few short months after release, they introduced a 16GB model at $499, dropped pricing on the 8GB model to $399 and put the 4GB model on clearance at $299.

Today, the iPhone is Apple's biggest cash cow and its MSRP is higher than the iPad's considering it costs more to manufacture the iPad. Could they have gotten away with it had the subsidy model not been in effect? I doubt it. Then again, smartphone penetration in the US probably wouldn't have been as high as it is now without the subsidy model. Same as other countries, mass adoption of smartphones would probably have started later if people had to actually pay full price for their smartphones.

A bigger punch in the face is that I paid $650 for a Nokia 3310 about 14 years ago. That thing could only make phonecalls and send messages.

Wow, seriously? Even when it was first released, I remember the highest it cost was PhP15,000 in my country (equivalent to ~$300). As for only being able to make phone calls and messages, that's not true. It can play Snake as well. I believe there was also a spaceship side scrolling shooting game of some kind.

 

[I7guy]

Look at it this way, before the subsidy model was introduced, Apple released the original iPhone 4GB at $499 and 8GB at $599. Just a few short months after release, they introduced a 16GB model at $499, dropped pricing on the 8GB model to $399 and put the 4GB model on clearance at $299.

Today, the iPhone is Apple's biggest cash cow and its MSRP is higher than the iPad's considering it costs more to manufacture the iPad. Could they have gotten away with it had the subsidy model not been in effect? I doubt it. Then again, smartphone penetration in the US probably wouldn't have been as high as it is now without the subsidy model. Same as other countries, mass adoption of smartphones would probably have started later if people had to actually pay full price for their smartphones.


Wow, seriously? Even when it was first released, I remember the highest it cost was PhP15,000 in my country (equivalent to ~$300). As for only being able to make phone calls and messages, that's not true. It can play Snake as well. I believe there was also a spaceship side scrolling shooting game of some kind.

Can you provide some credible back-up for this assertion? While intuitively it may be correct, different patents and licensing fees for the phone may not make that assertion a slam dunk.

 

[rui no onna]

Can you provide some credible back-up for this assertion? While intuitively it may be correct, different patents and licensing fees for the phone may not make that assertion a slam dunk.

Credible, only Apple has the actual numbers and they don't really include the manufacturing and licensing costs per product in their SEC filings. However, the following should be a good estimate.

http://technology.ihs.com/451425/gr...m-and-manufacturing-cost-ihs-teardown-reveals

http://technology.ihs.com/463579/ne...rd-generation-ipad-model-ihs-teardown-reveals

Somehow, I doubt Apple spends an extra $100 worth of licensing fees for the iPhone.

 

[I7guy]

Credible, only Apple has the actual numbers and they don't really include the manufacturing and licensing costs per product in their SEC filings. However, the following should be a good estimate.

http://technology.ihs.com/451425/gr...m-and-manufacturing-cost-ihs-teardown-reveals

http://technology.ihs.com/463579/ne...rd-generation-ipad-model-ihs-teardown-reveals

Somehow, I doubt Apple spends an extra $100 worth of licensing fees for the iPhone.

Interesting. But since only apple knows, my original statement still stands that this is a guess; maybe an educated guess, but still a guess.

Even so, not withstanding, there are a whole other set of costs associated with manufacturing that are more than labor, parts and licensing. We all know for most goods, there is a disparity between "actual" manufacturing costs and MSRP sales price. So if the subsidies disappear tomorrow, people will be financing $650 iphones. So I still say no to the original question.

 

[nateo200]

I think they do....head on to eBay....everyone is selling iPhones for $150~ -/+ what they paid....the smart ones know you need to offer features like unlocked to return closer to full value...most people don't fully understand that they are essentially financing their phone and its not *really* $199 or better yet (and my favorite as of late) *FREE*! Even if subsidizing by carriers died tomorrow so many places offering their own financing service now it wouldn't even matter...of course the perception would be that phone prices magically sky rocketed to the average joe even though financing privately and subsidizing are probably no different...in fact with good credit financing might even be cheaper who knows! Either way carriers would destroy allot of their user base if they got rid of subsidizing because that would end contracts...Verizon already has that program where you essentially "lease" your phone like a car...I'm guessing the pre-paid revolution is either scaring them or costing them a little..

Another funny thing that inflates the price of a smart phone: CDMA2000 only! Go look up verizon iPhone 4 vs GSM iPhone 4 on eBay! The price difference is hilarious!

 

[aneftp]

Smartphone prices at least for the past 10 years like I can recall msrp have always hovered around $500-700.

Just do a google search for "high end" Palm Treo, Blackberries and Nokia smartphones circa 2003-2007.

Nokia high end phones were hardly (maybe never) "subsidized" in the USA. Thus never carried by the big carriers. Yet they still maintained their high msrp in all parts of the world.

So the answer is no. Subsidies haven't inflated smartphone prices.

What has happened is Apple in 2008 forced the way carriers subsidized high end smartphones. They didn't change the price. But rather the carrier (att) was force to subsidize around $400 per line. Previously att could just force consumers to pay $300-350 for a high end palm Treo or blackberry. Those Treo and blackberry msrp hovered around $500-600. So att was preciously only subsidizing around $200-300.

Now they were on the hook for close to $400 per line. Now carriers didn't mind subsiding line 1 (the most costly line for consumers) the $400.

But 60% of Americans were on family plans. So the $400 subsidy for lines 2-5 was way too costly for carriers since those lines were generating as little as $10/month (if consumer used subsidy and than canceled the data plan and put flip phone on that line) than sold the iPhone off or never put data on that spare line.

 

[nnacrumors]

Now carriers didn't mind subsiding line 1 (the most costly line for consumers) the $400.

But 60% of Americans were on family plans. So the $400 subsidy for lines 2-5 was way too costly for carriers since those lines were generating as little as $10/month (if consumer used subsidy and than canceled the data plan and put flip phone on that line) than sold the iPhone off or never put data on that spare line.

Somehow it's hard to feel sorry for carriers 'losing' money on limes 2 - 5 when they keep announcing 5+ billion dollar profits each quarter like clockwork

I know what you mean though, from a business perspective it makes sense to squeeze every last dime out of their customers and maximize profits. Thanks for taking the time to write your above post.