Thanks to the unique position of wireless carriers in the smartphone market, Apple (and to a lesser extent its rivals) have enjoyed heightened US adoption thanks to the carrier subsidy model. When smartphones first came out it wasn’t a given that everyone would jump to an expensive data plan. To drive adoption major carriers like Verizon and AT&T decided to subsidize smartphone purchases in exchange for locking customers into a 2 year contract. This model was beneficial for iPhone sales in several ways.
The overall cost of owning an expensive phone and upgrading regularly was now lower. Since the monthly data bill did not change whether you were under contract or not, all consumers were encouraged to always upgrade to the latest model as soon as possible. iPhone owners enjoyed a third perk, as iPhones on average cost more than their competitors. Since the carriers decided to make the initial contract fee $200 regardless of whether you were signing up for a $700 iPhone or $500 Android device, iPhone users were effectively being subsidized by non-iPhone users.
All of these benefits are about to end. As smartphones have gone mainstream, carriers no longer need to subsidize the phones to get users to pay for data plans. To them it doesn’t matter if you have the latest iPhone or your old phone from 2 years ago. This is why they have been moving towards a monthly installment model and Verizon, the nation’s biggest, recently announced an end to all phone subsidies and contracts. Instead subscribers can now either bring in their own phone, pay full price for a new one or go on an installment plan where they pay the full cost of the phone in monthly increments.
This move from Verizon is bad for all smartphone makers because for the first time consumers are forced to choose how much they spend on a new phone. Back when all new phones still cost $200 the incentive was to choose the most expensive option (which was almost always an iPhone) and to upgrade regularly. But now by using an old phone or choosing a cheaper one consumers can save money. Those savings occur either all up front or on a monthly basis, so the likelihood of impulse purchases of the latest and thus most expensive models will go down. If a user doesn’t upgrade at all their monthly bill will drop substantially once their existing phone is paid off, making the cost of a new phone that much more apparent.
As the dominant market leader and the company with the biggest margins Apple has the most to lose to these changing industry dynamics. Premium brands always benefit the most from an industry subsidy, but when that subsidy ends, they suffer the most. It would be one thing if Apple could counter the de facto price increase on all iPhones going forward with significant improvements, but alas the commoditization of smartphones in general means those days are behind us. Consumers are about to be asked to pay more for a phone that stands out less.