In the run up to Apple’s earning call, one of the memes that started gaining traction about the iPhone was the death of the carrier subsidy.Apple collects ~$650 per iPhone, but consumers only pay ~$200 for a new iPhone. The carriers cover that ~$450 difference.
BTIG analyst Walter Piecyk put out a note earlier this month changing their subsidy plans, making it harder for customers to get new phones every year. He believed this would slow iPhone sales.
On last night’s earnings call, Tim Cook tackled the issue of Apple losing subsidies for the iPhone. He thinks it’s not going to happen.
Here are five reasons:
- Carriers make their money back over the life of a 24 month contract.
- The iPhone is the best smartphone in the world, and consumers will demand it. Apple will not bend on the price, so carriers will lose customers.
- The iPhone has the lowest churn of all smartphones, which is good for carriers.
- The iPhone is data efficient, which ultimately saves a carrier money.
- The smartest thing for a carrier to do is convert users from feature phones to smartphones, and nothing will do that better than the world’s greatest smartphone, the iPhone.
And here is his full answer, via Seeking Alpha:
Well, Bill, our focus is on making the very best smartphone in the world. And a phone that delivers a — just an off-the-charts user experience that customers want to use every day of their lives. And at the end of the day, I think that carriers, the vast majority of carriers, or maybe even all carriers, want to provide what their customers want to buy. And that’s what they’re motivated for.
And so the most important thing by far is for Apple to continue making great products that customers want. And we are deeply committed to doing this and are innovating at a rate and pace that’s unbelievable in this area. For — from a carrier’s perspective, I think it’s important to remember that the subsidy is not large relative to the sum of the monthly payments across a 24-month contract period. And any delta between iPhone and maybe another phone is a — an even smaller level of difference.
And the iPhone has some distinct advantages for the carrier over competing smartphones. For example, many of the carrier executives have told me that churn from iPhone customers is the lowest of any phone they sell in their whole — in all of the phones they carry. And that has a significant direct financial benefit to the carrier.
Also, our engineering teams work extremely hard to be efficient with data and differently than some others. And we believe that as a result of this, that iPhone has far better data efficiency compared to other smartphones that are using sort of an app-rich ecosystem.
Finally, we think that the — and this is the most important, is that iPhone is the best smartphone on the planet to entice a customer who is currently using a traditional mobile phone to upgrade to a smartphone. This is by far the largest opportunity for Apple, for our carrier partners and is a great, fantastic experience to the customer. And so there’s a win-win-win there.
And so I think all of these factors are — some of these factors are missed in this general discussion of subsidy.