Do Big Subsidies Have Big Staying Power?
It's been plain for a couple of years now that inexpensive, open-source Androids are popular in Africa and other places where people simply can't afford an iPhone, subsidy or not. I've written about that for a while; it's part of the reason that companies like Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) have such massive booths here at Mobile World Congress 2012. (See Android's Going Cheap and Huawei, ZTE: Global Devices With Nice Prices.)
This is good news for Google (Nasdaq: GOOG) since it gets its devices in the hands of more people for whom the phone is probably their sole portal for Internet access, hence boosting Google's mobile ad revenue. And, in reality, Apple Inc. (Nasdaq: AAPL) probably doesn't care too much about cheap Androids since it makes hundreds off carrier subsidies and gets to charge for mobile software upgrades and rake in app revenues.
The question for Apple or even high-end Android providers like Samsung Electronics Co. Ltd. (Korea: SEC) is: How much longer can the subsidy model in the U.S. can continue as is?
AT&T Inc. (NYSE: T), Verizon Wireless and Sprint Corp. (NYSE: S) have all justified massive up-front costs for iPhone subsidies because it brings them high-value customers. But those customers have to keep upgrading each year to the new iPhone, or the carriers will just end up stumping up for another two-year contract at the end of their terms. (See VZ iPhone Boosts Data, Shaves Margins in Q4. )
This quarter, AT&T, Verizon and Sprint all took margin hits because of their iPhone subsidies and their shareholders didn't like it. Ma Bell and Big Red can clearly afford to carry on the practice, but can Sprint? (See Sprint's iPhone Q4 Ouch!)
Now that the big three carriers all have the iPhone, the only real metric left to compete on is price. Notice that AT&T has been touting its additional data download speed with the iPhone 4S. Presumably even that minor advantage will disappear when the Long Term Evolution (LTE) iPhone eventually arrives.
So, subsidy pricing becomes the competition ground for the iPhone. That's not a battle that Sprint can win, but by fighting it out, even AT&T and Verizon risk pissing off shareholders with heavier margin hits.
Meanwhile, sub-$200, subsidy-free Androids get faster and more feature-rich every three to six months. They may never be the iPhone, and for many that will be enough to take them out of consideration. (I remember folks at a VC conference last year laughing about how Androids were for poor people, for instance.)
Nonetheless, they may prove to be a more affordable option for both consumers and carriers. As my editor-in-chief, Phil Harvey, is fond of saying: "Why wouldn't you buy one?"
Of course, if the subsidy model does start to break down over time, that also might start to tear at the standard two-year monthly contract in the U.S. But that's another kettle of chips for another time.
— Dan Jones, Site Editor, Light Reading Mobile