Is the iPhone Too Expensive?

Ask anyone in this country what an iPhone costs, and most will say that Apple's (Nasdaq: AAPL  ) iconic smartphone starts at $199. Models with more storage capacity will set stateside buyers back an additional $100 or $200.

However, this isn't what Apple is making. The world's most valuable tech company rang up an average of $659 per iPhone (including attached services and accessories) during the holiday quarter.

Who pays the lion's share of the difference? Wireless carriers are willing to subsidize more than $300 per phone, knowing that they will more than make that back by locking owners into two-year contracts. It's not pretty. Sprint (NYSE: S  ) , which was the last of the three leading carriers to begin offering the iPhone, isn't expected to turn a profit until 2015.

And it's not just carriers. Retailers are also hurting when consumers choose an iPhone over a higher-margin Android device. RadioShack's (NYSE: RSH  ) gross margins took a beating during the holiday quarter, and the iPhone's availability through all three major carriers at its stores was one of the culprits.

Now let's go overseas. You've seen the long lines and even riots at Apple Store locations in China. However, it's a different story in parts of southern Europe, where carriers can't subsidize smartphones.

The Wall Street Journal wrote yesterday about the iPhone's weak market penetration in certain countries. According to market tracker IDC, just 9% of the smartphones sold in Portugal are iPhones. In Greece the market share drops to a mere 5%.

In the U.S., Android phones don't sell for a lot less than iPhones. If you're willing to rock a 2009 handset, carriers will even give you the iPhone 3GS for free with a two-year wireless contract. However, in countries where handsets aren't subsidized, it's hard to justify a $680 iPhone 4S when a perfectly capable Android phone costs less than $200.

Apple's challenges in Europe aren't new. A study by Kantar Worldpanel ComTech two months ago showed that the iPhone's market share was slipping in Germany, France, Italy, and Spain.

The obvious rebuttal here is Apple's blowout fiscal first quarter. With or without continental Europe, Apple sold a whopping 37 million iPhones this past quarter. However, it does lead one to wonder if Apple's premium pricing is opening too wide a door for Google (Nasdaq: GOOG  ) and its army of Android developers to exploit the smartphone market as it penetrates the balance of the market.

Apple's stateside response has to keep older models around at lower price points, but given the rapidly evolving marketplace for both iOS and Android, that 2009 gadgetry has never felt so stale.

It's hard to knock Apple and its ability to carve itself the thickest slice of the industry's profits, but Android's European invasion is really just the beginning.

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The Motley Fool owns shares of Google, RadioShack, and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On February 28, 2012, at 2:45 PM, H3D wrote:

    $200 Android phones aren't perfectly decent, they're garbage.

    And the decent Android phones cost almost as much as the iPhone

    Nice try, but no coconut.

  • Report this Comment On February 28, 2012, at 3:02 PM, jdmeck wrote:

    As an Apple shareholder I think they should cut the profit just a little to remain competitive. Do it now while they are strong, not when it would be a sign of weakness.

  • Report this Comment On February 28, 2012, at 3:37 PM, lucasmonger wrote:

    @H3D - yet most people who haven't already jumped onto the IOS or Android bandwagon might not be as discerning. If they haven't tried all the phones to determine whether or not its garbage, then they may now know what they're missing. I have a daughter in college who brings an interesting demographic... all people in her circle of friends either have an iPhone or were given a cheaper Android by their parents and are dying to switch to an iPhone. The students that are geekier may convince themselves that a certain feature or CPU speed is better, but for the most part iPhones rule that particular campus.

    @jdmeck - I'm perfectly happy with Apple's performance as a stock. I think Apple will continue to make great margins and they've already lowered their prices (free for a 3GS, $99 for a 4). Apple will probably never lower their $199 entry point, but instead keep adding features to make that $199 entry point worth it at the right time when the technology supports it. So while there are other Android phones with 4G LTE and not much of a network yet to support it, Apple will continue to make tremendous profit using technology when the marketplace is ready to embrace it.

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