Categories

S is for Service

One of the enduring mysteries of the iPhone has been its lack of a portfolio. After six years it seems that Apple has finally acquiesced that there should be one, albeit currently limited to two items. The second enigma is related to the price, namely why does Apple ask so much for its phones? At an average sales price of $600 it’s a shocking premium to the average phone, and with a six year run, a shocking resistance to the corrosive effects of competition.

The obvious answer to why Apple asks so much is because it can. Anybody would if they could. That’s a poor question. So the right question should be: why does anybody pay this much? One could answer that few do and it’s not a mystery that some feel better paying more simply because they can. But those who pay Apple’s prices are, mainly, not consumers. They are operators. Exactly 270 of them.

So then let’s re-ask the question: Why do so many operators pay so much for Apple’s phones? We can’t answer that with the psychological slurs usually directed at the brand. Surely Operators aren’t competing in beauty contests or need to soothe their collective egos. The decisions operators make on whether to range a phone are driven by hard economic realities: ARPU, churn, network costs, depreciation, ROI, etc. Some clearly can’t make the iPhone fit their economic models and indeed about two thirds of them don’t. But the most prominent[1] do. DoCoMo, the largest in Japan just did after holding out for five years. Verizon held out for years, as did T-Mobile. China Mobile’s acceptance also seems imminent.

But that still leaves the question of why are those operators who do carry the iPhone willing to pay so much for it? I only assume that their decision process is likely to be rational. Mainly because we have a large enough sample but also because there is a lot of money at stake requiring quite a bit of internal consensus and vetting before committment. We have to conclude that operators place the orders because they obtain value from the iPhone even when it’s priced at a premium to the average alternative.

The question which follows then is how do they obtain value? I’ve argued that this follow-the-money process leads one to conclude that the iPhone helps in moving users to higher revenue data services. These are more profitable services for operators and the subsidy model creates more loyalty and thus reduces churn and creates a stable cash flow which can then be leveraged through debt to upgrade networks and attract yet more loyal iPhone users.

Therefore the iPhone is “a data service salesperson” receiving a large commission (in the form of a price- and hence margin premium) for doing what few others can do. In that sense the iPhone is hired by the operator to do a unique and valuable job and is paid well for doing it.

This answers the question of why Apple can get away with charging so much for its phone: because operators love it. The entire product depends on a reward system and for years we’ve heard fears that it’s going to end. But it hasn’t. Operators love subsidies and they’ve been honing them for long before the iPhone showed up.[2]

But this is not the end of the money trail. The premium is initially paid by the operator but they tend to get most of that payment back from the consumer. In other words the subsidy that inflates the iPhone price is at least partly if not mostly paid by the consumer in the form of a higher phone bill.

You won’t see it itemized on your bill, but it’s likely that $10 to $15/month from a subsidized phone service plan goes toward paying for your phone.

So in a way, Apple has managed to place itself on many people’s monthly phone bills. It’s a nice place to be. It’s nice for the same reasons operators like post-paid customers: predictability. It’s also nice because recurring services are a better business model than products; they have higher levels of loyalty and are more “sticky”.

But this placement is not transparent. It smacks of misdirection. The link is not made in the mind of the consumer that they are paying for a phone through their service plan and many see it as a thinly veiled con. The value of the iPhone to the user may be evident through its use but the payment for that value is not.

But in many ways this is similar to how many services are valued: through bundling. We pay for the value of a great retail experience through a higher price on items purchased. But we still associate that price with the good sold not with the place where it was bought. We get great value from Google’s services but don’t know how to quantify the cost of their peering into our minds. In fact the whole Internet and all business plans that are built on it depend on a subtle “something for nothing” type of misdirection. The Internet runs on the arbitrage between a consumer service market where everybody consumes but nobody pays and a separate data market where nobody consumes and everybody pays.

The iPhone could thus be finally understood as a complex service business. It captures value through the phone bill but delivers value through a screen. A misdirection magic trick which many have tried to pull off. It’s essentially tapping into the $1.3 trillion communications market, skimming profits by delivering the “content” which lights up the wires.

It’s great except it does not work everywhere. Not yet at least. The complexity of services means that they are usually found in more advanced so-called service economies and rare in less developed so-called goods economies.

Economists have observed this process and even have a name for it: servitization: The process whereby almost all sufficiently advanced products are indistinguishable from services.

As a service, the iPhone’s strengths are easier to understand. Its weaknesses as well. Services simply don’t work in economies which don’t have robust institutions of credit, capital intensive infrastructure and distribution networks.

It’s also the reason why Apple is so slow to penetrate all markets. It’s not in the business of selling phones. It’s in the business of enabling and creating services.

Notes:
  1. Arguably the most important []
  2. Recall that the first iPhone was sold without subsidy and with a separate, secret revenue sharing plan. It did not last because it was cumbersome and because operators convinced Steve Jobs that their way was better. []
  • http://search.websonar.com:8080/ Duane Bemister

    Brilliant

    • Andy Orr

      Seconded — one of the clearest explanations for some of the subtleties in the smartphone market.

  • obarthelemy

    To work, this model needs
    - subsidies, to make the device cost palatable to the public
    - tiered data plans, to motivate the carriers
    - high purchasing power, to be able to afford both those things
    - and a premium image, because premium customer want a premium device

    That seems indeed a very narrow niche. I’d argue it’s actually narrowing, with the phone-less plans from T-Mobile (copied by ATT and VZW), France going no-subsidies… Is the proportion of subsidized contracts rising anywhere ? Is it falling fast ?

    As you note, the whole thing hinges on the devices’ cost being hidden. And the devices being perceived as premium. Both seem at risk in the short term ?

    • fivetonsflax

      Tiered data plans, really? Those who do not remember recent history are doomed to forget where they put their keys.

    • Mark Jones

      The cost of Android and Google services is also very well hidden. Someday that will also be at risk.

    • Kizedek

      But the model does work, has worked and is working. Probably most of the 30-odd million iPhones Apple sells per quarter are sold this way. The launch weekend of the 5C and 5S will no doubt be another record breaker.

      • obarthelemy

        The other model does seem to work a bit better ?

      • Kizedek

        Maybe so, in some markets or circumstances. But it’s not either/or. There are 4 options for carriers and other phone retailers which they are free to choose from:

        a) they don’t sell the iPhone at all
        b) they sell it at full-price only
        c) they sell it subsidized only
        d) they sell it by both models

        Of course the iPhone doesn’t always sell as well unsubsidized as it does subsidized — people are going to think twice about spending 650 vs 99 or 299. Nevertheless, it does extremely well. And people buying at full-price know exactly what they are getting and why they are getting it. It certainly isn’t about cool factor when you are making that choice.

        You left off a reason people might choose subsidized:
        They see phones as a necessity and they treat it like a service which they can budget for or justify for business purposes. They are well aware that over the course of a contract they will pay much more for the phone than they would have, had they purchased it up front. Nevertheless, they decide they can “worry” about that later, because the benefit of having the iPhone is greater and will increase their opportunities. Similarly, these people are also making an informed choice and are not swayed by any cool factor.

        Apple isn’t going to lower the price of its quality products just to gain marketshare, just to suit you. Get over it already.

      • obarthelemy

        “people are going to think twice about spending 650 vs 99 or 299″. Yep. ‘coz that’s what a subsidized phone costs…

        “They see phones as a necessity and they treat it like a service which they can budget for or justify for business purposes.”. Also, they don’t know to compare subsidized vs financed.

        Apple continuing to lose marketshare suits me fine, BTW :-p

      • Kizedek

        People also don’t know how to compare buying an iPhone to buying:

        a feature phone/smartphone used as a feature phone
        + a mobile gaming device
        + an ebook reader
        + a widescreen media tablet
        + point-and-shoot camera
        …half of which remain in a drawer gathering dust half the time, and all of which together don’t provide the value proposition provided by the iPhone as the more usable and powerful general purpose mobile computing device.

      • Sergei

        You mean, the model of lying about activation numbers? Yes, it seems to work better for now, but only until Google is sued for false advertisement.

      • metrics

        Please pick a metric or three to quantify “better”.

    • handleym

      “France going no-subsidies”

      This would be the same France where Free is so sure that their subsidy-free business model will win that it went to court to declare subsidies illegal (and lost in early 2013)?

      Seems a strange thing to do if everything is already going your way (just IMHO)…

      • obarthelemy

        You mean, the same way suing about rounded corners is weird when you’re belaboring the point that your devices and ecosystem are so much better that others don’t even compare ?

        Yep. Same logic.

      • handleym

        You’re just DETERMINED to miss the point, aren’t you?

        I say something refuting your claim that “France is going no-subsidies” and you insist on turning that into a claim about Apple’s lawsuits.

        Like I said :”Seems a strange thing to do if everything is already going your way (just IMHO)…”

      • obarthelemy

        You’re saying suing proves that a strategy is not working. I’m simply providing another example of suing, which, I guess, must prove the attached strategy isn’t working either ?

        Your reasoning is way wrong anyway, Free is very successful, both in terms of market share, profit, and share price. Succeeding doesn’t mean Free shouldn’t try to use all the guns at their disposal, and subsidies as they’re done by carriers are indeed borderline illegal in France: they could be seen as a consumer credit, which follows very strict rules that carriers are not abiding by effective rate disclosure, indebtedness checks…)… but they managed to sidestep the issue indeed

      • Tatil_S

        Yes, it does (“must prove the attached strategy isn’t working either”). Without suing Apple could not prevent Samsung from copying the looks of its devices. Now that the obligatory Apple bashing is out of the way, does that mean you are on board with the claim that subsidy model is more beneficial for carriers? If subsidies were not working, why would anybody would bother lobbying to get them banned?

      • obarthelemy

        Because every little bit helps: subsidies do work, on the subset of the population who either

        1- can’t calculate a x b + c
        2- don’t have friends to tell them
        3- aren’t engaged with the media

        or
        1- can’t afford a $xxx phone right now
        2- but can afford a 2-3 x $xxx phone over 2 yrs
        3- are not aware that any type of credit is cheaper than that

        or
        1- can’t say no to their carrier’s telemarketers

        There’s surprisingly many of those: probably 10-25% of the market in the long run. I’ve heard Free is even planning on addressing that market, too. It’s a fast-shrinking niche though. But very profitable.

      • RadarTheKat

        I see this comment a lot. Here’s a brief write-up I did to explain what’s really driving the Apple/Samsung lawsuit, for those not conversant in the topic of design patents.

        Apple’s assertion in its lawsuits is that Samsung has copied elements of the iPhone and iPad for which Apple holds several patents. These particular patents are known as design patents. It seems a lot of folks don’t take these patents seriously and go as far as to suggest that they should not exist. There is a good reason why they do exist, but to explain this we have to begin with a bit of a side trip and requires that we speak about trademark law. Bear with me on this and hopefully I’ll be able to clarify the purpose of design patents and provide some insights into the Apple versus Samsung trial.

        Most people are familiar with the idea of a trademark. By way of example, Kellogg, the cereal maker, has a trademark on Tony the Tiger and fought a battle with Exxon over Kellogs’ claim that the use of an unnamed tiger in Exxon’s advertising violates Kellogg’s trademark for Tony the Tiger. Why? For 30 years, Exxon used its tiger character exclusively to promote its gasoline blend, but then, in the 1990′s began using it to sell food. Kellogg said consumers are confused by the similarity between the cartoon tigers and may conclude that Kellogg is somehow behind soda, coffee and other items for sale at Exxon’s TigerMart stores. The case went back and forth for several years, with Exxon initially winning the case, but ultimately losing on appeal. This case would not seem extraordinary to most people as most folks understand the concept of protecting a unique trademark like Kellogg’s Tony the Tiger character.

        Now let’s look at another case, one that comes closer to the Apple vs Samsung case, but still an application of trademark law. This case is Ferrari vs Robert’s Replicas. Back in the 1980′s Robert’s Replica’s was in the business of manufacturing fiberglass kits that replicated the exterior features of Ferrari’s Daytona Spyder and Testarossa automobiles. Roberts’ copies were called the Miami Spyder and the Miami Coupe, respectively. Ferrari brought suit against Roberts in March 1988 alleging trademark infringement.

        Here’s what this case was about: After Ferrari vehicles have been on the market for a number of years, the design of those vehicles acquires what’s called “secondary meaning”, a concept at the heart of trademark law. Secondary meaning refers to an association of a design, like the design of a Ferrari vehicle, with quality and craftsmanship or other positive attributes one might associate with the Ferrari brand. After a design has acquired secondary meaning, trademark law can be applied to protect the company from those who would copy its designs and use them to promote their own products. Robert’s copying of Ferrari’s iconic designs could confuse the public and dilute the strength of Ferrari’s brand. Just the presence of large numbers of replicas would dilute Ferrari’s image of exclusivity, causing financial harm to Ferrari. Trademark law, under the concept of secondary meaning, protected Ferrari. The courts ruled in favor of Ferrari in this case and enjoined Roberts from producing the Miami Spyder and the Miami Coupe.

        But how does this relate to design patent law?

        The problem with using trademark law to protect a company’s designs (under trademark law a product design or package design is referred to as “trade dress”) is that a product has to be on the market for a long time before its design acquires secondary meaning (i.e. before the design becomes iconic and is seen by consumers as representative of the company behind the product). When competitors come in immediately after a new product design is introduced and copy it, as is the assertion in the Apple vs Samsung case, the originator of the design doesn’t have the luxury of time needed for its product design to acquire secondary meaning in the eyes of consumers. Consumers immediately see the same design from multiple companies and so don’t grow to associate the design with the company that originated that design.

        This is where design patents come in. Where trademark protection of an iconic product design has no expiration, it takes time for a new product to acquire that protection (as stated above). A design patent offers immediate protection of a new and novel design and for a period of 14 years thereafter, giving a company protection of its original designs until they acquire secondary meaning in the market and therefore protection under trademark law. So the design patent serves a valuable function for companies like Ferrari, and Apple.

      • DesDizzy

        Thanks for that lucid explanation of design patents. Much appreciated.

      • Chaka10

        … the same France where Kantar shows iPhone gaining share on Android.

    • Tatil_S

      I don’t know if you are US based, but T-Mobile’s move does not mean subsidy model is on its way out. T-Mobile’s coverage is patchier than the big two and it has been so for a long time. It is more of a desperation move, even though I personally wish for transparency in pricing and an easy path to switching carriers through an end to subsidies. Verizon is definitely not copying it. To this day, it does not give you any discount for buying an unsubsidized device and its cheapest individual smartphone plan is $100 per month. Ouch!… The only benefit is the ability to get out of contract any time you’d like.

      AT&T is a little more accommodating through MVNOs, but they usually do not offer LTE, just some vague 4G claim and they skimp on customer service if any problems occur. In any case, pricing (about $20 per month cheaper) is still set such that you don’t save any money unless you hold on to your phone for 20 months or more. It is even worse if you get landline broadband or cable TV service through discounts for bundles or get corporate discount on your personal phone. (All the big networks offer such discounts for employees of large corporations.) After all that, no-contract gives you the ability to switch between T-Mobile and AT&T, that’s all. You cannot switch your phone to Verizon or Sprint unless your phone was activated on their networks when it was first purchased.

    • tippingpoint

      At any point when the balance tips they can easily change their strategy to be closer to that of their other product lines. But I’m sure they’ve done the math for this year, and next year, and don’t believe that point has been reached.

  • Eli

    In the last episode of the Critical Path, you had a throwaway comment about how operators loved Nokia phones in the late 90s because they made text messaging easy…and profitable. (And operators fled from Nokia when they burned down Symbian).

    Operators love Android because they can lard it up with their own services, and I’m sure some other reason(s).

    Serious question: can a coherent story be told about the rise and fall of the mobile companies solely from the operator perspective? What do they get from Samsung?

    • rationalchrist

      From Samsung, low subsidiary cost and ego satisfaction of some VPs of operators who think they can design. Business is rational, but also emotional.

    • Mark Jones

      Samsung gives operators low subsidies, huge $ in marketing assist, huge $ for salespeople (spiffs), quick delivery of lots of variant models as specified by the operators. How can the operators not love all that?

      Other than marketing, Apple gives the operators none of that, and yet many still sign up the iPhone for duty.

      • Chaka10

        Indeed. To use Horace’s salesman paradigm, you don’t pay your salesmen the same, and the operator’s behavior — spending their marketing and sales dollars (which is what subsidies are) on the iPhone — is the best demonstration, in my book, of the iPhone’s competitive position — it’s simply better at selling the carriers’ services and brings in more of the kinds of customers they value.

        This, by the way, translates internationally as well. Thus we see Docomo and soon China Mobile signing on to the iPhone in order to stem losses of users to their competitors who have specifically used the iPhone as a competitive edge.

      • RadarTheKat

        I love the smell of network effects in the morning.

    • http://www.asymco.com Horace Dediu

      Operators can love more than one product or platform. In fact they love most of all the idea of not having one supplier. They also can afford to make mistakes. If one phone they range is a dud it’s killed off quickly without much opportunity lost. I can’t say if there is anything specifically valuable about Samsung except they probably comply well with the requirements from Operators.

      • Walt French

        You didn’t particularly highlight one point — perhaps it was too obvious: carriers also want to carry phones that people will want to buy enough that they generate a sale, instead of the customer walking five doors down the street to a competitor.

        Samsung has used advertising to reinforce its brand, smartly from what little I know, and I’ll wager that the customer satisfaction scores are at least no worse than LG’s, Moto’s, etc. If a bunch of customers come in and ask for a big-ass phablet, how can the carriers fail to notice?

  • Sergei

    Unfortunately, advances in technology is commoditizing smartphones. As much as I love Apple, their global market share continue to fall.

    • anon_coward

      cars are commodities as well yet people still buy acura’s and lexus’s. every commodity market you have a segment on the right side of the bell curve that takes home the most profits

    • phyrexia

      As happened in the PC market. (And take a look at who, for the last couple of years, had success in that area?) Market share is, I think, not important to Apple. I guess they’re happy carving their niche and charging you a premium.
      I’m always baffled when people point to Apples’s shrinking marketshare. They never had a significant portion of it, did they? Not even if you single out smartphones. Android just happens to be replacing Symbian and other “dumbphones” ( mostly at least).

      • RadarTheKat

        Steve Jobs, in 2007, made a statement along these lines. He stated that he would be happy to capture 10% of the smartphone market share. At that time, smartphones represented only 10% of all mobile phones, so he was saying he’d be happy with just 1% of the entire mobile phone market. Apple went on to handily exceed that percentage and even in today’s market, rapidly converging to a majority smartphone market, Apple has exceeded Jobs’ wish. But the main takeaway is that Jobs and Apple never intended to take over the market; they knew that they could make an excellent product only by serving the high-end of the market, leaving the commoditized middle and lower tiers for those who are willing to lose money on each unit, but make it up in volume, as the old joke goes.

    • Mark Jones

      1. Apple’s global market share of “smartphones” continues to fall, but Apple’s global market share of all mobile phones continues to grow, because users are transitioning from featurephones to smartphones. Only analysts care about “smartphone” market share. Apple doesn’t.

      2. The high-end of smartphones is nowhere near being commoditized. There are thousands of desired jobs that can be done by other larger devices (PCs, consoles, tablets) that still can’t be done by smartphones. The A7, M7, 64-bit, iBeacons, etc are just the first steps toward doing those jobs.

      • Jeff G

        Great points!

    • FlyOffTheWall

      Sergei, we’ve all heard the “But Apple’s Market Share Is Shrinking! Apple Is Doomed!!1!” refrain so many times that we want to vomit.

      I won’t pretend to compete with Horace’s excellent analysis here in Asymco, but in a very few words: the phone market is in the midst of a huge switch from feature phones to smart phones. Feature phones are losing share extremely rapidly. Android and iOS are gaining. iOS is not gaining as rapidly as Android. There are many reasons for that. Some consumers are replacing a feature phone with a “smart” phone, but they are really just using it as as touch-screen feature phone. In many rapidly changing regional markets, a lot of the infrastructure for providing the smart services that Horace describes in this article are – as yet – underdeveloped. That has an impact on consumer choice.

      There are many factors at play as well in the way that the world responds to the technological change that’s currently underway in mobile communications and mobile computing. Yes, we all know that market shares are changing. We also know that there are much more interesting things going on. That’s why we read Asymco.

    • Jeff G

      Their market share of profits is not falling.

      • willo

        This statement is unfortunately incorrect.

    • Walt French

      Nike was just added to the Dow Industrials this week, despite the fact that only a tiny minority in India, China and Indonesia buy their $50–$200+ shoes.

      I’m sure they’d love to sell a billion pairs of shoes or more in China every year. Despite the popularity of basketball there (which Nike sponsors), Nike’s market share of footwear (or should that be shoeware?) is quite low, however.

    • Nangka

      They say love is blind but your love for Apple doesn’t have to be. Read all these excellent responses for better insights.

  • Chaka10

    “I only assume that their decision process is likely to be rational. Mainly because we have a large enough sample but also because there is a lot of money at stake requiring quite a bit of internal consensus and vetting before committment.”

    … Also because they won’t stay in business (long) if they don’t behave rationally from a competitive point of view.

  • phyrexia

    Horace, wasn’t the reason that Verizon got the iPhone so late that Apple and AT&T had an exclusive deal, enabling them to be the only operator selling the iPhone? And not because Verizon chose so? I seem to recall Telekom Deutschland and Swisscom having similar deals in their countries.

    • Mark Jones

      Apple went to Verizon first and was rejected. Then Apple signed a “multi-year” exclusive deal with AT&T, which was redone a year later when Apple agreed to subsidies (see Horace’s footnote 2). Subsequently, Verizon tried to compete, first with Blackberry Storm in 2008, and then with Droid (Motorola) in 2009, investing $100s of millions in marketing dollars. Even though Droid started to make gains during 2010, Verizon still chose to sign on for iPhone as soon as the exclusive period ended.

      Verizon chose to reject, then Verizon chose to sign up as soon as it was allowed.

      • phyrexia

        Thanks for the info. Didn’t know that they rejected it at first. I bet they the executives that voted against it, or the CEO looked quite stupid afterwards.

      • Walt French

        Pretty sure that the trip to Verizon was a hedge or bargaining tool on Apple’s part to focus AT&T’s attention. Apple knew VZ would be a tough negotiator, while AT&T was in bad straits due to a difficult acquisition in which Cingular bought the old AT&T (and then took the name); many unhappy customers and they needed one of those “just crazy enough that it might work!” plans.

        You can read more about iPhone history in some articles in Wired written by Fred Vogelstein. (His name will help in google finding the right pieces.) Fascinating stuff.

        See also my note to sumocat.

      • Nangka

        This theory makes sense since AT&T is GSM and as most rest of world. That turned out well for Apple with subsequent rollouts covering more markets than if they had gone non-GSM.

      • Walt French

        I won’t underestimate the challenges of radio engineering (having done a bit), but the chips were available for purchase off the shelf. If Apple made it big with Verizon, it’d easily be able to afford the switch to GSM. Obviously, however, the business dealings were big issues.

  • Chaka10

    This is great analysis. I would quibble only a slight bit as follows:

    “… the subsidy that inflates the iPhone price is at least partly if not mostly paid by the consumer in the form of a higher phone bill” — that suggests that if you purchase a cheaper phone, your phone bill should be less (since the phone cost part of it should be less). That’s not the case in the US, at least not with standard VZ and T contracts. The “service analysis” of that doesn’t break down, but needs to be tweaked, I think, as follows — operators clearly provide a service (mobile connectivity, data capacity, bandwidth). The US operators’ charge a lot for that service — because their networks are expensive to build (and rebuild as “G”s advance), capacity on limited, and there’s great demand. It’s a profitable business to provide the service, if you have the right kind of customer. The operators therefor compete for the desirable customers. The could do so through discounts or reductions on their rates or other incentives like phone subsidies. They do the latter, presumably because that’s effective and efficient for their business.

    • handleym

      “The US operators’ charge a lot for that service — because their networks are expensive to build (and rebuild as “G”s advance), capacity on their network is limited, and there’s great demand.”

      The one thing I’d add to your analysis is that you have misrepresented the reason for the prices of US telcos.
      Prices expand to fill the money available to pay for them. The US is an especially rich country, which means there is a large amount of money available to pay for cell phone services. THAT is what drives higher US prices.

      A simple-minded economist would claim that “competition” would change this. Such a claim confuses the tradable and non-tradeable costs of telcos. The telcos (whether 4 or 40 of them) are all competing at auction for the same spectrum. They are also all competing for cell tower locations. (They are even all paying the same price to Qualcomm et al as first movers and hence paying for the research that gives us a constantly evolving system, though this is the one cost a carrier CAN opt out of if they and there customers are willing to put up with a lousier service.)

      There is no way I see out of this. As long as the US feels that spectrum should be auctioned, that price is going to reflect some sort of “total US willingness to pay for data mobility”. Likewise those renting cell tower spots are perfectly aware of what the market will bear.

      If we’re ever going to get beyond the constant whining of “America is so unfair/ backward/ unrepresentative compared to [France| Korea| Finland| China| Russia| Somalia| The Solomon Islands]” THIS is what needs to be addressed. Where are the US carriers spending their money, and how does that compare with foreigners?

      My guess is that in the US the bulk goes to spectrum and cell tower leases, and that other countries, for one reason or another, have a very different version of those costs.

      A second possibility is that a lot of money in the US goes to maintaining the networks of ATT or VZW or Sprint or T-Mo shops, and that other countries don’t suffer from this overhead. This I’m much less sure of. Those shops seem like a crazy overhead, but the very fact that no-one seems willing to give them up suggests that they are essential in some fashion.

      • Chaka10

        “you have misrepresented the reason for the prices of US telcos”

        Hmm, I think that what you’ve elaborated upon is exactly what I meant by: my reference to “their networks are expensive to build (and rebuild as “G”s advance)” — for many reasons including cost of spectrum, etc.; and by my reference to demand for limited capacity — in the sense of willing money to pay for, and drive up price of, a scarce resource. Am I missing something?

      • Walt French

        Let me reinforce the notion that the auctioning and multiple standards help carriers segment the market. But the FCC’s role seems mixed. Genakowski was all too aware about gamesmanship on the spectrum auctions, but couldn’t get the votes to make the process more fair; Congressional obstructionism prevented a quorum for that exact purpose. Still, just today, I saw a piece that AT&T got its arm twisted to support an LTE standard so that small carriers weren’t too disadvantaged on LTE.

        There’s a flip side to this, though: in Europe, prices and tariffs are regulated in a way that makes it harder to make the fat profits that Horace notes in the US; again, just today news came out about an EU-wide fair-roaming-charge plan that’ll undercut a big problem for many users, but will also cut the excess profits that encourage investments into the infrastructure.

  • poke

    I think an important missing element in this story is that with iOS 7 and FaceTime audio all devices now have a full array of previously phone-only features. The phone has migrated into software and is now free with every device.

  • H-Mark

    I think that for providing these services a lot of infrastructure is needed on Apples part. (Siri etc..). Now with a cheaper 5c and a sharp rise of demand in the emerging markets it doubt that apple could cope with a run on a cheaper 5c. This might also have been a factor on pricing considerations.

  • http://sumocat.blogspot.com Sumocat

    Another obstacle slowing iPhone penetration was the alliance formed to back Android, the Open Handset Alliance, which included several mobile carriers. Fun fact: China Mobile is the only carrier left on the Open Handset Alliance that does not yet offer the iPhone.

    • Walt French

      Decades ago, Jobs dismissed IT types as “orifices” thru which Apple had to squeeze in order to sell Macs to corporate users. (Ill will from that snark persists to this day.)

      That same attitude exists at the carriers. Apple was apparently tossed out on its butt in 2005(?) when they discussed how wonderful they were at Verizon, but it may have been mid-management types who did it; a source told me that about a half dozen were fired for allowing Apple to get a 5-year excloo with AT&T. Company posturing aside, Horace’s point that they’re 99% in it for the money sounds right.

      Which makes China Mobile so interesting…many possible reasons for the exception. The company has only recently validated China’s proprietary technology; it could have been horribly embarrassing to have Apple phones needing a recall to work right. (I actually thought the warranty/electrocution kabuki was plowing the ground for that likelihood.)

      More likely, the Ministry wants to develop local brands and opportunities, which would be harmed by letting Apple define standards and expectations.

      Or perhaps it’s just a question about how much of the overall pie China Mobile expects to reserve for itself, made more difficult by the fact that they have hundreds of millions of lower-income customers who can’t afford the billions that the well-connected hope to get out of the deal after Apple takes its cut.

      Of course, it would be unusual if there were NOT some deal such as e.g., Samsung buying off some official to drag his feet on the deal. Chinese economics is just like that, although Apple works under the Foreign Corrupt Practices Act that has sharp teeth, so it’d be the brave employee who OK’d any such.

      Finally, China is under no practical obligation to give Apple access to its markets; Apple can’t go to the WTO and ever expect to do anything other than redouble China’s efforts to completely internalize its telecom through a thousand means.

      • Tom Fraser

        A change in CEO was not unrelated. Randall Stephenson did not get along with SJ.

      • Walt French

        “Randall L. Stephenson is an American business executive. Stephenson is the current chairman and chief executive officer of AT&T Inc. He succeeded Edward E. Whitacre, Jr. in 2007.”

        I’m not quite understanding this. Stephenson was not, by Wikipedia’s reckoning, in the driver’s seat when AT&T made the deal with Apple.

      • RadarTheKat

        As for China being under no practical obligation to give Apple access to its markets, we should remember that China is hungry to grow its economy and put its people to work. Apple is a significant employer in China, in assembly facilities and also in retail and also an indirect employer in retail. Apple pays well compared to others and infuses a decent amount of money into the Chinese economy. Even with a strong Apple presence in China, there will remain plenty of room for local brands.

      • RadarTheKat

        As for a China Mobile/Apple partnership, this is less critical for the very fact that many smartphones in China are sold unsubsidized. Over 20 million China Mobile customers currently use iPhones on China Mobile’s network, all of them suffering with 2G data speeds. With both new iPhone models supporting and licensed to work on the China Mobile 3G and budding 4G networks, how many new and existing China Mobile customers will upgrade to a new iPhone. Could be dozens, even hundreds, many thousands. LOL!

      • DesDizzy

        The reasons are probably much simpler, state monopolies are often arrogant (see Docomo), and unwilling to accept non-preferential treatment unless the business case i.e. losing a large number of your most affluent/profitable customers, becomes compelling. Nokia, Samsung and all the Chinese upstart handset manufacturers are happy to genuflect to China Mobile, Apple is not.

        Docomo, is an excellent example of this, along with T-Mobile, Docomo have had a stranglehold on the Japanese market for decades and have decided exactly what technology and services the Japanese consumer gets. It is not caving into Apple, after all these years, for love. It is caving in to Apple because it is bleeding profitable, high spending, customers to the competition.

  • jjfranklinnn

    Horace,

    You mentioned “But those who pay Apple’s prices are, mainly, not consumers. They are operators. Exactly 270 of them.”
    Isn’t that only true in subsidized countries? What about your analysis with respect to the countries (especially China) and carriers that makes the consumer pay the full price of a handset? Does not the consumer need to then see the “value” that Apple offers rather than the carriers. And therefore requiring a different thesis in how to approach these countries?

  • cdelrosso

    The iPhone has certainly been able to resist competition at the high end and managed keep its premium price, so far I would add. Times are changing and Android devices are equally competitive in terms of features and ecosystem at a more convenient price.
    You focus on operators that buy iPhones to be sold to customers, but this is not the case in many markets. Most people still buy unsubsidized phones and most probably their first smartphone is not going to be an iPhone. And once in that ecosystem they most probably will buy another device in the same ecosystem. Apple seems it does not care, they can still get customers pay their premium price, but one wonders for how long. The stock market is not happy about that.
    Fred Wilson has a good post on this exact topic :
    http://www.avc.com/a_vc/2013/09/reactions.html

    • isitjustme

      I get my iPhone unsubsidized and do I want an android no and I am not sure about others.

      I like using it and take great pride in it too.

      I wonder if the talking heads at wall street are so clever what sort of phone will they make to make our lives better.

      One more thing Apple is more than the iPhone and many talking heads missed that.

    • Sander van der Wal

      So there are two businesses, Apple selling iPhones to operators, and Apple selling iPhones directly to consumers. Which one makes the most money, and is therefore the most important one? Changes are, it is the selling-to-operators business.

  • Martin

    You won’t see it itemized on your bill, but it’s likely that $10 to $15/month from a subsidized phone service plan goes toward paying for your phone.

    In Switzerland, two of the three mobile providers, Orange and Sunrise, offer a discount if you do not get a subsidized iPhone from them. In my case, I got a monthly discount of CHF 15.00 (about USD 16 or EUR 12).

    In the case of Swisscom, I paid CHF 499.00 instead of CHF 969.00 for my iPhone 5 with a 24-month subscription, i.e., the subsidy is almost CHF 20 a month (without discounting).

  • DarwinPhish

    Carriers that subsidies make the most profit from customers who keep their phone the longest. Thus, there is value to carriers in devices which are built better and which remains useful to users longer.

  • Apyth

    Schools teach that the value of IT services is the sum of utility(*) and guarantee, the latter being a composite of availability, continuity, capacity & security / access. Since then I’ve mainly thought of computers – incl. laptops & desktops – as “services providers”. I’d even argue that classic apps are in many ways services, they “exist” only when “consumed” (at least from the consumer point of view). In this perspective, the value of Macs lies in good part in the build quality, battery life, security and so on, i.e. reliability. Thus features-only (“utility”) comparisons are necessarily biased.

    For mobile, the possible points of failure of service delivery are even more numerous and accidents (at the terminal level) more probable. Furthermore, users in general, when confronted to a failure in delivery, do not diagnose in which layer the failure lies. Which means failures in delivery can be attributed to the phone maker – and it often is – but also vice-versa. I’d argue that the terminal quality is thus critical for carriers, especially if they want to sell premium services.

    And conversely, if the carrier’s service quality (“guarantee”) is bad / weak, it has much less need for very reliable terminals.

    (*) : I’ve completely ignored here the idea of jobs-to-be-done, not because it’s not interesting, but because I don’t how it fits with this framework.

  • Jacob Willliams

    The bottom line is this: We are all justifying Apple’s actions. Trying our hardest to explain the iPhone5s and iPhone5c.

    The lens gets foggy if you breath too close to it.

    • RadarTheKat

      Apple doesn’t need us prognosticators to justify its actions; the market will do that in time. So far, each Apple release, even with the occasional speed bump, like antenna-gate or the Apple maps fiasco, has allowed Apple to sell more units while maintaining margins that have long been the envy of the industry. Only Apple has been able to play this game, while others play the game of increasing unit volumes at great expense to margins and overall profits. No justification needed for that.

      • Jacob Willliams

        You think so? Alright. I was under the assumption that we (those that listen to asymco) cared more about the product than the business structure.

        If the iPhone was still the superior “product” we’d all be discussing how great the product is. Not how great the business strategy is.

        You know, McDonalds is profitable and has efficient systems as well.

        Does that mean I should eat there? Certainly I should buy their stock. But that’s a different question.

      • blogboys

        Go to a tech blog if you want to drool over products. You seem upset that a business analysis blog is analysing business strategy, and are making strange inferences as a result.

      • Jacob Willliams

        Well, you make a great point. But I actually prefer the thought provoking and challenge that Horace and commentors like yourself bring to the table. I don’t want to go circle jerk with the android religion. And I own three companies, one in tech repair, a landscape design firm, and most recently a web tools offering. The first two have done very well, and I believe Horace’s insights and others here helped me to get where I am.

  • http://www.isophist.com/ Emilio Orione

    Apple is selling services to its customers by mean of developers not operators. Apple strength is the ability to create a development platform that creates value for developers.
    Operators are a channel for Apple and Apple is the only company to have requirements of quality of service for an operator to offer their products.
    Quality of service allows apps on iPhone to shine, every move they do is to maintain the best ecosystem, only 270 operators out of 800 have the iPhone, Apple is choosy about them.
    The strength of Samsung is in its ability to deal with operators and customize their hardware to operator’s needs, Apple strengths are in its ability to capture developers work and in its appeal to customers.
    Operators buy iPhones because customers want iPhones and pay for it premium data contracts, but customers want iPhones because of their hardware and apps.

    Even the new 5c 5s split is a move to increase app value, since from now on every new year the last iPhones will be a couple of devices, one that apps will be able to use at is full strength because it will have last year hardware for which the apps have been created, and one overserving the app ecosystem with new hardware features that apps will spend next year time to be able to use.
    Two advantages, lifetime of apps increased, excitement for new app versions increased since they will be able to exploit new hardware capabilities.

  • Sanjeev

    Following along with the iPhone as operator salesperson extraordinare, Horace do you have any analysis on what the split of Apples iPhone revenue is between operator-subsidized vs. unsubsidized? I would be particularly interesting to see the trend line….

  • davel

    That is a great last paragraph.

    The premise about why the operators want Apple you have stated several times in the past.

    Nice article.

  • Chaka10

    Horace, I ask your indulgence with this piece. I tried to post it on the Apple 2.0 post that reported on your analysis above, but had some problems.

    I think I can credibly claim no surprise from Apple’s 5c pricing. I suppose I also wasn’t surprised that everyone hates it, given the reaction I sensed of deep ambivalence (outright hostility in one case from a familiar Apple blogger — yes you, @Hosni) to my blog comments that “the one thing I don’t think Apple will do is go [sic] broadly distribute an aggressively priced 5C”.

    The degree to which the singular focus has seemingly overwhelmed other announcements has been disappointing, and seems to highlight a deep insecurity about Apple’s loss of global smartphone market share. Understandable perhaps. But, let’s look at some data:

    According to Kantar, Apple has been gaining share in the US, UK, France, Japan (even without Docomo). ComScore shows the same in the US. The Americas accounted for over 40% of Apple’s net sales in its latest fiscal quarter. That does not include “Retail” sales in the US, which is included in a separate reporting segment. It’s well known that the Retail business is disproportionately built out in the US, but even just assuming a ratable geographic breakdown within Retail, US net sales including Retail in US represented over 46% of total net sales. On this same basis, Japan net sales, including Retail in Japan, represented 8% of total net sales.

    SO MY FIRST MAIN POINT IS, even with its existing three-tiered product and pricing strategy, Apple’s is (i) gaining share in the US and Japan (even without Docomo), which collectively represents more than 54% of Apple’s business and (ii) gaining in some important countries in Europe (25% of Apple’s business).

    As IDC and others have pointed out, smartphone growth is now in the large emerging markets, specifically China and India. China represents 15% of Apple’s net sales (including Retail on the same basis as above).

    According to reports from China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA), as of the end of 1Q13 they had an aggregate 280 mm 3G subs, representing only ~25% penetration.

    IDC’s China Mobile Phone Quarterly Tracker reports that in China during Q1 2013 (I haven’t seen data for Q2 yet) mobile phone shipments were 97 mm units, smartphone shipments were 78 mm units and shipments of TD (China Mobile 3G network compatible) smartphones were 28 mm units. This last number matches up nicely with the reports by CHL of 26.5 mm new 3G subscribers added in this period.

    During this same period, China Unicom and China Telecom had 20.4 mm combined 3G subscribers added. Based on the China Mobile experience, we may use this number as a rough proxy for total 3G smartphone shipments by China Unicom and China Telecom or for their networks, perhaps with some slight rounding up, say to 22 mm units (say for replacement units).

    Together with the 28 mm 3G smartphones shipped by China Mobile, this suggests that total 3G smartphone shipments by or for the networks of all three Chinese carriers in 1Q13 was ~50 mm units. Again, that’s is an estimate, but it suggests that a significant portion (perhaps 28 mm) of the 78 mm total smartphone units in China for 1Q13 were 2G phones, which presumably Apple does not consider to be within it’s target market.

    SO MY SECOND MAIN POINT IS, while the iPhone had a 9% share of total smartphone shipments in China for 1Q13 according to IDC, I estimate that it had a 30% share (30%!!) of total 3G smartphone shipments by China Unicom and China Telecom. That seems like a better reflection of iPhone’s competitive performance in China.

    Assuming, China Mobile is signed, and assuming Apple can reach, even with it’s existing offerings and pricing, the same 30% share it has of China Unicom and China Telecom 3G smartphone shipments, that would imply an additional more than 8 mm units. Again, that’s just assuming that China Mobile’s users react the same way to Apples existing offerings (without any discounts or cheap phones). That would result in Apple’s share of total China smartphone sales (even including any 2G “smartphones) reaching 19%, more than double it’s current share.

    I do not have sufficient data to do this analysis for India, but I believe that market is like China, but smaller and lags in development.

    SO MY POINTS IN SUMMARY ARE:

    Yes, China’s important, but the best opportunity to address that market is by signing China Mobile.
    No, Apple shouldn’t sacrifice market share for profit, but it makes no sense to do something to expand a small (for now) part of your business in a way that jeopardizes the biggest parts of your business where Apple’s existing strategy is working.
    Yes, Apple should consider appropriately aggressive pricing in China (and other EMs), it it should do so in a way that appropriately and specifically address the relevant local market and any case it makes no sense to do so until it signs China Mobile.

    NOW QUERY, why are Apple analysts so surprised and negative about Apple’s refusal to announce a cheap 5c for broad distribution?

    Some additional thoughts regarding pricing in China and other EM’s: It frustrates me to no end when I see commentators talk about pricing the 5c at $550 in EMs — for getting the $180 of VAT. Note, assuming Apple has 50% GMs in the 5c, that would be $275 of gross profit per unit, BEFORE operating expenses. That is less than $100 more than the $180 of VAT. So, how much room is there for Apple really to cut its prices in China? Should Apple really, as @Hosni posts, “emulate Amazon with respect to Kindle sales: Accept a smaller profit on the iPhone 5c in order to ‘recruit’ new customers”? I say NFW, not to recruit 2G customers in EMs who won’t use iTunes/App store (and iTunes is not fully available) in a way that provides the desired stickiness, and in a way the hurts Apple’s existing (large) business in US and other developed markets.

    Lastly, I attach a screen shot (translated) of China’s Tenaa.com.cn announcing network access licenses for China Mobile’s network for an iPhone model A1516 (a version of 5c that works on TD-LTE and CHL’s 3G TD-SCDMA). There is also an A1518 (a version of 5s that works on TD-LTE and TD-SCDMA). Neither show up (yet) on the 5s and 5c model listings on Apple’s website. The models on Apple website show they work only on TD-LTE (China Mobile’s 4G, but not 3G TD-SCDMA).

    • DesDizzy

      Excellent response Chaka10. Analysis appreciated.

      • Chaka10

        Thanks for saying so. Honestly, my biggest disappointment, disgust even, is with the Apple observer and analyst community who would even think to suggest (nevermind insist) that Apple must heavily discount a 4G LTE phone, and do so for all its markets (!!), in order to address emerging markets where 3G penetration rates are in the mid 20% range in China (single digit in India)! For any one still insecure about the Jobs admonishment about sacrificing share to go for profit — let’s recall that he made the original decision to go exclusive with AT&T, which basically gave VZ no choice but to promote Droid. I think that was the correct decision, but the point is, Steve Job’s point was, to go for share strategically, not willy-nilly. Leave that to the modular, low cost producers.

        I don’t know that my numbers and estimates are all exactly accurate, but I don’t need to — TC and rest of Apple management know them precisely, they know Apple’s history, they knew Jobs personally, they know the carriers. If I can figure out the above on a rough/directional basis, I’m betting they can figure out and are making the best decisions for Apple. Period, end of story.

      • DesDizzy

        Just a shame that the so called “Professional” analysts are too lazy/stupid to do the level of analysis that you have undertaken on emerging markets.

    • Walt French

      “ I see commentators talk about pricing the 5c at $550 in EMs — for getting the $180 of VAT…”

      Of course, VAT is on the difference between input costs and the sale price, so Apple’s profit is also taxed. Cut the retail price by $100 and the VAT goes down by the percentage times $100. And also of course, consumers who can’t afford a $2000 trip to HongKong will have a hard time dodging the VAT, so I’m not sure why it’s not the same sort of cost as what Apple pays for CPUs—it’s part of the cost of offering a product.

      A second concern: while I agree that 3G is a necessary service level for an iPhone to be useful, it’s not sufficient. My own usage has taken off substantially, Siri, Maps and other services are dramatically more useful, over LTE (when available) or the 3.5G fallback that AT&T offers. If 3G is just now becoming common, many of the usage patterns, social apps (e.g., microblogging vs Instagrams) won’t be developed into a critical mass that sets expectations for full-service phones.

      US carriers have invested relatively heavily since the iPhone showed up, and we now seem to have reasonably good 4G- or 3G-class coverage. In China, while I was amazed to see 4 bar signal strength in rural areas of poor provinces, the support networks still need building out, and utilization just isn’t there to afford it yet.

      • Chaka10

        Yep. My point on VAT is simply that it’s the biggest component of additional costs over list in many countries and it’s not entirely up to Apple to cut those costs.

        On 3/4G, yes agree too, though I’d point out that the relevance of mobile broadband adoption is not just for better iPhone/high-end smartphone usability (though it’s certainly that). Importantly, it also drives data usage and ARPU, which facilitates carriers’ ability and incentive to pay subsidies, which feeds back into iPhone/high-end smartphone adoption. As I posted in another comment on Asymco (“Think local…”), it should be a virtuous cycle, but many factors go into the development of the mobile telecoms market in any given country (including VAT and import duties …, regulations, etc) and Vendors (Apple) can’t necessarily start or accelerate the cycle themselves, certainly not only with pricing.

  • RichardinMelbourne

    Marketers have been pushing a services > goods perspective since a 2004 Journal of Marketing article (google: Vargo and Lusch 2004). They call this area: service-dominant logic… an interesting read…

  • soyroberto

    Right on the Spot = It’s not in the business of selling phones. It’s in the business of enabling and creating services.

    • Walt French

      Right now, Apple seems to be in the business of creating a computing platform. The services are all …in service of drawing users to the platform.

      Wake me up when Siri is available on Android phones, or when you can edit your iCloud photos on a Surface tablet. Then I’ll know that they’re in the services business.

  • SockRolid

    re: “It’s not in the business of selling phones. It’s in the business of enabling and creating services.”

    Which means that Apple is well on the way to transitioning from its long-standing hardware revenue model to its future content-and-services revenue model. Consumer electronics prices and therefore margins inevitably decline over time. Apple will need to ramp up its income from services in the 10 to 20 year timeframe.

    I think their Touch ID for general retail and their still-secret television strategy will be huge moneymakers for Apple in the future. Both are potentially extremely disruptive. But I’m not so sure about “iWatch.” Is there enough money in wrist-top mobile computing to make it worthwhile for Apple to pursue?

  • Bill Esbenshade

    Great post Horace! Everyone thinks the trend is away from subsidized phones, but what if the trend is actually toward greater and more creative subsidies/payment options as emerging, developing markets continue improving capital infrastructure and credit institutions (which clearly is happening in China and seems to be happening in India)? Apple is coming up with innovative ways to accomplish the affordability “job” in developing economies, with the recent phone trade in program (many of those phones will go to India and China) and with installment sales in India.

    Apple has also slowly educated major carriers on the value of the iPhone as a salesperson for data charges — e.g., Verizon, Docomo, and it now appears China Mobile. Again, the trend is toward greater subsidies, not less. And from an equities perspective, Apple should be compensated for the data charges it helps drive — that’s a reasonable bargaining position to take.

    • obarthelemy

      you also need
      1- the trend to be towards more tiered data plans vs unlimited or unlimited+throttled. For unlimited plans, carriers want the opposite: that customers use as little data as possible, and don’t overload the network.
      2- monthly fees to be high so a $600+ phone is somewhat negligible

      I’m at $20/mo for unlimited throttled at 3 or 4 GB. Tiering becomes irrelevant, while a $700 phone is a very noticeable expense compared to yearly network charges of $240.

      I think the “smartphone as a data salesperson” is mostly bunk. Carriers are not so much selling data as they are selling contract to start with. “smartphone as a contract salesperson” maybe (I’ll sign with you if you reward me with a nice toy for cheap), high-end smartphone as an high-end contract salesperson sure (I’ll take something shiny to go with my top-rate service contract), but “I’ll use more data because my phone does more/is more expensive”, not so much.

      • Walt French

        Trouble with your idea is that it’s very hard to find somebody who’ll pay up for unlimited service and then not use it. People eventually tend to dial back — or maybe even change carriers — when they realize they’re wasting their money for an accommodation they never utilize.

        Anyway, suppose there *were* an identifiable group that would pay for unlimited data but then use essentially nothing. Very likely, it’d make sense to lower the price to these users a bit, and suck in more of ‘em, because at zero utilization they’re pure profit. In regions where there’s only one viable carrier choice, it means they’d simply get more ARPU; in competitive areas you’d expect a race to offer the lowest price for unlimited. Real competitive markets would see the price fall until it matched the marginal cost of offering the service, i.e., zero.

        So these unicorn all-profit users that you imagine can’t exist in actual competitive markets. In somewhat competitive ones, the price might still fall so that the profit from the unicorns matches the profit on limited plan users, who don’t use up their full allocation each month, either. In markets with monopoly providers or very inefficient markets, who knows what evil lurks in the Marketing Dept, unchecked by competition. Only non-usage can compete, which is also likely from ridiculous prices.

        Carriers would be quite happy to sell contracts that required them to do nothing. Even the most dysfunctional markets pretty much keep it from being more than a small fraction of what happens.

      • obarthelemy

        People will pay for the peace of mind of never having overage. Many of my fellow “unlimited” users around me also use the 500MB-ish monthly I use, because wifi is taking the brunt of our activity. When we discuss contracts, they, like me, don’t think saving $5/mo is worth the risk.
        Exception: the Youths, who stream a lot of video, eat up a lot more bandwidth sometimes, though 3G streaming is so-so.

        Also, again, I’m not sure pipes cost that much, compared to other account handling costs (invoicing, support, other infrastructure). I think we’re talking past each other because the US market is very expensive, and very tiered.
        PS Horace has banned me from his site, so you’ll all be able to engage in your blinkered Apple lovefest unbothered from now on.

  • Chaka10

    I mentioned on a post I just put up on Apple 2.0 that I would also put it up here, with an attachment. See below. It is further to the comment I previously put up on this thread.

    Critics will quickly point out (so I will save them the trouble..) that the price of the phone is “built into” the monthly charges, which are high end, and that the plans require a commitment of 2 years. Yes, surely. But carriers do pay subsidies, at a cost to the carrier (accounted for on it’s P&L, and it’s a marketing expense), and the subsidy is a benefit to mobile customers, particularly high ARPU customers, and disproportionately to iPhone users. I would encourage readers to look up China Unicom’s 1H 2013 interim results presentation and study page 19 (Apple 2.0 doesn’t permit attaching screenshots, but Asymco does, so I may impose on Horace and put it up on that site). It shows, in simple terms, how China Unicom pays a subsidy to acquire high ARPU customers. Also, it shows in simple numbers how it benefits China Unicom when its customers are encouraged to upgrade from 2G to 3G (ARPU goes up on average by 80%!! and data usage goes up on average by 450%!!!!). This is why carriers are willing to pay the subsidies (which I think are disproportionately iPhones). I set out some thoughts in more detail in a longish analysis that I’d put up in the comments section on Asymco “S is for Service” piece.

    Carriers world wide face two realities — (1) they offer a scarce resource (their networks can support only so many users using so much capacity) and (2) their networks are a sunk cost. That means the focus of carriers world wide is to gain as many high ARPU users as possible, and even more so, on a committed (contract) basis. That’s why they pay subsidies and suggestions that there’s some sort of slight of hand that fool users is exaggerated.

    • Walt French

      Hmmm… “ARPU higher than 2G” and “Improved Handset Subsidy Efficiency.”

      So Horace’s long-standing “iPhone hired to sell data services” claim is not only observed, but called out as a central part of the carrier strategy.

      Fancy that!

      • Chaka10

        Yes, indeed, and a Chinese (not US) carrier, at that.

  • Anurag31

    Hi,
    I do not agree with the last para that for iPhone economy cannot work in emerging market economy but only in the developed one. For it to work it needs a virtuous circle between iPhone (or smartphone) and network provider to move minimum threshold of users into higher ARPU orbit. The third leg of this stool is the content provider who complete the circle for this users to justify the additional expense (ARPU). This has worked like a charm in USA, not so successfully in Europe (iPhone is a success but carrier margins are far behind USA) and could do in China and India but may not at same price point as that of USA (economic reality of Purchasing Power Parity – PPP will intervene).
    Like USA, Apple has to find a way to built a relationship that is beneficial for all involved i.e. Apple, Wireless carrier and content provider, it has not found that yet.

    http://anurag-myrants.blogspot.in/2013/09/iphone-why-such-high-asp.html

    • Chaka10

      Add Japan to the list, with the US, of the virtuous cycle working like a charm.

      “economic reality of Purchasing Power Parity – PPP will intervene”. This misapplies the concept of PPP, which is an adjustment factor to take into account purchasing power differences of CURRENCIES, NOT CONSUMERS, in different countries.