Would You Pay $100 More for an iPhone?

The market loved Apple (Nasdaq: AAPL  ) today, and rightfully so. After falling in 10 of the past 11 days of trading, the world's most valuable company is soaring after a blowout quarterly report.

The financials are fantastic, but not everything is perfect:

  • Mac revenue merely kept pace with inflation by climbing just 2% higher over the past year. MacBook revenue actually declined.
  • We've seen iPod sales posting year-over-year declines for several quarters now, though a 25% plunge this time around is still problematic.
  • Apple sold 11.8 million iPads. That's a respectable showing, but analysts were expecting 13 million iPads.

In other words, Apple really has all of its iEggs in the iPhone basket. The iPhone is now 58% of Apple's revenue, and iPhones represent nearly 60% of the gadgets sold.

There is nothing necessarily wrong with that, but it's going to draw more attention to the iPhone's prospects in the future.

Here is where things get hairy. Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) , the country's two largest wireless carriers, are getting antsy. They both experienced double-digit percentage declines in iPhone sales sequentially this past quarter. A dip was expected. The iPhone 4S was introduced late last year, and smartphones are somewhat popular as holiday gifts.

However, this is giving the carriers the opportunity to speak up about how much more they have to subsidize the iPhone over any other handset. They're tired of shelling out between $300 and $400 to Apple for every iPhone sold. Carriers have been effectively pushing Android devices as a more cost-effective alternative for their bottom lines. Now they're cheering on Microsoft's (Nasdaq: MSFT  ) fledgling Windows Phone as a mobile operating system.

"It is important that there is a third ecosystem that is brought into the mix here, and we are fully supportive of that with Microsoft," Verizon Wireless CFO Fran Shammo said during last week's call.

Apple is fine. It's obviously still selling plenty of iPhones, especially abroad, where the subsidization deals vary by country. However, with Verizon and AT&T grumbling -- and Sprint Nextel (NYSE: S  ) still a few years away from profitability -- should Apple be thinking about its carrier partners?

What if Apple bumped this year's iPhone 5 devices up by $100, letting carriers take most of that figure in the form of smaller subsidies? Would the carriers still be raining Lumia phones on their customers? Would the freshly incentivized carriers push to win market share for Apple -- or would customers balk at paying $299 for an entry-level iPhone 5?

This may not be the answer, but it's a conversation that needs to be had. Apple is feasting on the iPhone, and wireless carriers are complaining about getting only scraps.

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

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (13) | Recommend This Article (5)

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  • Report this Comment On April 26, 2012, at 12:06 AM, InvestWhatWorks wrote:

    If AT&T and Verizon doesn't want to subsidize the iPhone any more, I'm sure Sprint welcome their customers with open arms. Or if not Sprint, maybe one of the five regional carriers that just got the iPhone a few days ago.

    And those regional carriers are already offing the iPhone for LESS than the major carriers. Alaska Communications, for example, is offering the 4S for $150 with a two-year contract or free with a three-year contract. As more carriers get the iPhone, AT&T and Verizon will continue to lose the ability to negotiate with Apple for a better deal on the subsidize.

  • Report this Comment On April 26, 2012, at 12:50 AM, dschleicher wrote:

    I would pay $100 more for an iPhone. That's about only one month of phone service.

  • Report this Comment On April 26, 2012, at 1:31 AM, new2stock2006 wrote:

    The first carrier that tries to increase the price of iPhone could have the fate of Netflix. Therefore this is hard to implement. There are other players in the market to gobble up the subscription.

    If ATT, Verizon and Sprint decide to do this at the same time and I have to go with one of these three then still I would go with it and pay the $100 bucks extra instead of jumping on to another phone.

    If it is possible I think carriers should increase the contract on iphone from 24 months to 30 months if they really are whining about the bottom line. They should be very cautious though, if they take a wrong step their bottom line will disappear with the subscribers.

  • Report this Comment On April 26, 2012, at 1:36 AM, TechnoHistorian wrote:

    Hey, let's check our facts here!

    The new conventional wisdom is that the carriers are doing Apple a big favor with those subsidies. But has anyone bothered to do a probing cost analysis? I've had iPhones from day one, and I've been paying the better part of $100 per month to AT&T-- that's a total of about $5,000 to AT&T with just a small fraction of that going back to Apple. If it weren't for the iPhone, AT&T would not be earning all those bucks, a small portion of which goes to Apple.

  • Report this Comment On April 26, 2012, at 2:20 AM, JokerJoey wrote:

    Users expect the best possible experience. The iPhone provides the best possible experience, and I don't care what the carriers tout. Once you experience the alternatives, you understand this issue. This gives the pricing power to Apple. Period. And yes, I would pay an extra $100, indeed $200 for the iPhone as opposed to some of the other disjointed and difficult alternates.

  • Report this Comment On April 26, 2012, at 4:18 AM, Oceansbottom wrote:

    I would replace all 5 phones in my family even if the price were increased by 200 dollars. 3 of us have has iPhone since they have come out and the remaining 2 for the last two years. In our view, this is the best product and for a while this phone will have a level of price inelasticity. I don't have insurance on the iPhone but let me tell you something. If all 5 phones broke right now or got lost, I would replace all 5. And my household income is just over 85k per year.

  • Report this Comment On April 26, 2012, at 8:59 AM, mnosense wrote:

    Apple has to pay me $500 to use iPhone.

    I hate Apple's products! They want to control me rather than I can use them freely.

    Name a few, stupid iTune, no flash memory slot just to force you pay hundred more for the 16GB. The world is using USB, dumb Apple!

    Apple can't sell its Mac till it finally chose PC hardware and standard interface. It just quickly forgot about that.

  • Report this Comment On April 26, 2012, at 9:04 AM, daveshouston wrote:

    Here's the thing. The carrier's want to reduce the subsidies without a corresponding reduction in monthly service fees.

    I'd be happy to purchase an unlocked unsubsidized iPhone at full price if Verizon and/or AT&T would reduce my monthly charges accordingly and change to deal from a two year contract to no contract. But no, they won't do that. They want to keep charging the same outrageous monthly charges even if I buy an unsubsidized iPhone.

    In other words, they want it both ways. They want to lock you in with the two year contract and the big monthly fees, but they don't want to pay Apple for the device. Apple should hold their feet to the fire.

    Apple understands that the carriers are not the customer. They're the middle-man. If your pricing decisions ignore the customer's interests in favor of the middle man, you err.

  • Report this Comment On April 26, 2012, at 9:30 AM, ddaydetroit wrote:

    If you get an Iphone get a factory unlocked one in the long run its much cheaper and if you do not like your provider you can go to another one with no hassle.

    I now use my Iphone with tmobile at less then half the price AT&T was charging me a month in 10 months the savings will pay for my phone and I can use my phone when I travel outside the USA

  • Report this Comment On April 26, 2012, at 9:36 AM, CluckChicken wrote:

    It is not just the phone price, the iPhones are extremely data inefficient when compared to the Androids or WP7 so it put hit on the margin from monthly rate as well. Charging $100 more for the iPhone is probably a far smarter move then trying to get everybody to pay more monthly.

  • Report this Comment On April 26, 2012, at 9:49 AM, TMFBent wrote:

    Great points Rick, and something most people won't consider, even though it's pretty obvious something has to change. A lot of iPhans believe that Apple is doing the carriers a huge favor by bringing in all those iPhone customers, but the math shows that's not the case. In addition to the heavy subsidies you mention, and the data inefficiences Cluck Chicken posits, iPhone users are famous for using a ton of data, and demanding more and more. A 4G iPhone will only make this worse. Someone has to pay to install and maintain all that bandwidth, and it ain't Apple. Something's likely to give here, and we're seeing it happen already with Verizon (which was pretty hostile to WP7) finally seeing it as a viable platform that can help them diversify away from the low-margin tyranny of Apple. Look for the handset prices AND the plan rates to go up.

  • Report this Comment On April 26, 2012, at 12:26 PM, bigtee959 wrote:

    The iphone is a solid device and works great but I wouldn't shell out an additional $100 per handset to own this device. I have carried the 3GS, 4 & 4S as well as most/many of the Android devices. I'd rather carry the my droid and within 4 weeks of realese the device is generally reduced to $99. I dont have that cash to spend on a new idevice but hey thats me.

  • Report this Comment On April 26, 2012, at 12:58 PM, jafutral wrote:

    I've not yet actually heard the carriers complain. So I am not sure where all this speculation comes from.

    But let's back up a bit. The fact that there are any subsidies is because that is what the carriers wanted, or at least ATT back with the original iPhone.

    And if I upgrade my iPhone before the contractually approved time, I already pay $100 more.

    The iPhone on ATT not only outsold all other smartphones, it also outsold every other cell phone.Add to that the iPhone already uses the data networks more efficiently. That pretty much makes the iPhone ARPU (or whatever it is called) higher both net and gross for an iPhone user than any other cell phone user.

    Now if the carriers want to complain about something like that, good luck to them and I would ditch their shares faster than they can complain.

    As for the carriers getting excited about Windows, why wouldn't they? Expanding their offerings is probably a core feature.

    Joe

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