If there’s one thing that gives phone service carriers a profound sadface, it’s Apple’s iPhone “subsidy.” In order to sell the most popular phones in the world (the Apple 4S, 4 and 3GS, in that order), they enter into a multiyear deal with Apple during which they subsidize the cost of the iPhone in order to make it more attractive to customers. Apple stipulates a stiff subsidy, too; so stiff that analysts predict carriers will revolt any day now and tell Apple to cram it. But is that day here? No, no it isn’t.
If carriers don’t subsidize the iPhone to make it affordable for customers, the business they’re seeking for offering the phone in the first place is likely to walk out the door. AllThingsD comments on the pressure those poor, poor carriers are experiencing now that, instead of making billions and billions of dollars, they’re only making billions of dollars:[quote]“We continue to believe carriers would lower iPhone subsidies if they collectively felt that competing devices would drive the same economics as iPhones,” says BMO Capital’s Keith Bachman. But right now, they don’t. And with no other hero handset to mitigate the risks of the spike in customer churn that might follow a reduction in iPhone subsidy, we’re unlikely to see one in the near term.[/quote]
With AT&T, Verizon and Sprint all locked in to long-term deals with Apple, it’s hard to consider a renegotiation for lower fees is nigh.
One of the most important things to consider when examining the whys and wherefores of the subsidy is to compare Apple’s business model to their biggest competitor, Google (who makes the Android operating system). Where Apple’s model is concerned, they make money if the customer loves the phone. If that doesn’t happen, they don’t profit. Where Google is concerned, profit comes from putting as many eyes on as many ads as possible. The phone is secondary because (as you can tell from the rock-bottom prices) not many companies make their fortune from an Android handset. The carrier mostly banks on the low subsidy and the contractual monthly fees while Google wants to serve up more ads. This, obviously, whets carriers’ appetites for a similar deal with Apple where crappy phones can be sold for dirt cheap so the contracts come easy and with maximum profit. So far it looks like Apple has neither plans nor need to budge, and carriers who don’t want to be locked out of the iPhone’s unqualified success will have to stick with the program… albeit begrudgingly.