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What Is That iPhone Really Worth? A Fool Dives In.

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So you want to buy an Apple (Nasdaq: AAPL  ) iPhone 4S, but you're not thrilled about the idea of locking it into a two-year service contract? AT&T (NYSE: T  ) absolutely requires a long-term commitment, with a $325 early termination fee if you jump ship early. Verizon (NYSE: VZ  ) jacks the early breakup fee up to $350 -- right alongside Sprint Nextel (NYSE: S  ) .

iPhone virgins just got the option to get their Apple fix from Sprint's Virgin Mobile brand. That's a prepaid service without long-term contracts. You trade the flexibility of not being locked in for a healthy dose of sticker shock -- the same 16GB iPhone 4S that sells for just $200 with those two-year agreements will set you back a hefty $649 at the Virgin store.

Oh, and the cheapest available combination of voice and data services costs just $30 a month. That's a pretty serious discount to the $60 you'd pay at AT&T or $70 with Verizon or Sprint. Those savings add up quickly, as we'll see in just a minute.

In all fairness, Virgin wasn't first in line. Leap Wireless (Nasdaq: LEAP  ) already announced iPhone options for its Cricket brand of prepaid services, too. Both services start shipping iPhones later this month. A 16 GB iPhone 4S goes for $500 here, paired with a $55 unlimited-everything monthly plan.

What does it all mean?
Let's have a closer look at the numbers. This is what a 16 GB iPhone 4S really costs when paired with unlimited call minutes and SMS texting, plus the fattest wireless data plan available:

Data compiled from each service's wireless sites and press releases. Taxes and add-on services not included.

The savings really add up in the long run. Going with Cricket or Virgin would cost you less than $1,850 over two years versus $2,600 for the Sprint brand or more than $4,750 at Verizon. That's $2,900 of savings when compared with the nation's largest service provider -- and the most expensive unlimited-everything plan.

And the difference only grows larger if you don't trade in your phone every two years. After three years, the Verizon iPhone adds up to $7,040 while Cricket and Virgin stop short of $2,500. You really do save a lot in the long run by paying a little bit extra up front.

The picture changes a bit if you just want the most basic service available. Here's the same graph, using the cheapest calling and data plans available (hold the SMS messaging, please -- we have iMessage on this thing!):

Data compiled from each service's wireless sites and press releases. Taxes and add-on services not included.

In this view, AT&T actually looks cheaper than Cricket and only $631 more expensive than Virgin. But then, it's not really an apples-to-apples comparison. Virgin offers unlimited data and text messaging even in its cheapest plans -- and Cricket sells only unlimited-everything plans.

Yes, those discount-free sticker prices are a high barrier to entry. Many consumers will not pay that much in a single gulp. Still more simply can't do it. But this is the way mobile business is done in a large part of the world, including most of Europe. It's a proven business model, just not so much in North America.

So now we're getting the option to buy iPhones at full price with significantly cheaper service plans. It's kind of a watershed moment in Apple's history, because the Cricket and Virgin iPhones serve as a litmus test for unsubsidized iPhones in America.

The long-term savings are undeniable, but so is the sticker shock. And the lack of carrier subsidies unmasks Apple's phone for the cash cow it really is.

The most expensive Android smartphone from Virgin Mobile is a WiMax 4G-capable beast that runs the newest Android version on a very fast processor. It costs $300 today. The top-shelf non-iPhone option from Cricket is kind of a holdover from 2011 but sells for around $200 along with a Web discount that almost cuts the price in half.

Virgin's best Android can hold its own against the iPhone any way you slice it, and it sells for less than half the price (though that difference shrinks significantly in the long run). Cricket's situation is less clear-cut, with a much cheaper but also less impressive Android option.

But we want this to fail, dear
So will smartphone shoppers look at their prepaid options and think, "Hey, that iPhone is worth a premium even if it hurts this month," or will they shrug collectively and continue buying Androids? I believe we'll see the latter, and that your average iPhone shopper isn't thinking about long-term savings anyhow. Like the unsold iPhones in Portugal and Greece, the Apple inventories at Cricket and Virgin will probably collect more dust than cash.

That's what Apple really wants anyway. If consumers ever catch on to the value of prepaid plans in a big way, or the networks simply get tired of trading rebates for far-out profits, then Apple would have to compete on a far too level playing field. And that's where the margins fall apart.

Today, the high prices that Apple charges for the iPhone are hidden behind carrier rebates. The consumer sees an iPhone for $199 next to a high-end Android at the same price and grabs the iPhone without a second thought. Give the Apple product a significantly larger sticker price, and the opposite decision gets a lot more tempting. The iPhone may or may not be the best phone on the planet, but it commands a downright ridiculous share of today's handset profit margins. And that could change very quickly in an unsubsidized world. Apple can't afford that sea change.

This risk is one reason I have an active thumbs-down CAPScall on Apple right now. But our senior technology analyst certainly thinks Apple is still a buy. He spills out exactly why vanishing subsidies don't scare him in our brand-new premium report on Apple. If you'd rather learn about the broader smartphone revolution and an alternative way to profit from it, find out why investors are so excited about this exploding mobile revolution.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinion, 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.

Read/Post Comments (4) | Recommend This Article (6)

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  • Report this Comment On June 09, 2012, at 8:06 PM, FreeRange1 wrote:

    "Virgin's best Android can hold its own against the iPhone any way you slice it..." - this is a totally ignorant statement by the author! The iPhone is about much more than the hardware. It is about the total ecosystem which Android doesn't even come close to matching. Considering that most smartphone users also own another Apple device (minimally an iPod) it only makes sense that they stay with the Apple ecosystem as they have already invested in it and have other devices now, or in the future, that will all sync and work together. When you consider things like iTunes, the $99 Apple TV, etc. there is no way that an Android phone can hold a candle to the iPhone. This is the reason that Android users are switching to the iPhone, and the iPhone user provides the highest customer retention rate of any other device user.

  • Report this Comment On June 09, 2012, at 10:10 PM, aeosfool wrote:

    As the previous poster mentioned, "it's the software stupid" that should be remembered when asking why so many people are buying iphones when they could be buying androids or other smart phones for less initial cost and monthly service. Look at the satisfaction rating of iphones vs. other smartphones.

    Iphones make incorporating all the photos you have on iphoto and songs etc on itunes work seamlessly...and now with icloud the bond to the Apple ecosystem just got that much tighter.

    I will agree that the average iphone user doesn't realize how much more they pay for an iphone because of all the subsidies because a friend I recommend buy an unlocked iphone from Apple was astonished when I told her how much she was going to save despite paying $450 more at the time she purchased the unlocked iphone. She uses a lot of minutes and texts a lot and would have been robbed blind by Verizon or ATT.

    Having said all that I don't think iphone subsidies are going anywhere anytime soon...since the cost is hidden, ATT /Verizon/Sprint can reap huge profits(albeit over the long term) by keeping things just the way they are...and if they cut the subsidy they risk losing that huge profit to the other guy that doesn't.

    One final note; who says subsidies are being reduced? Several new carriers Apple addded earlier this year actually increased the amount of subsidy they paid and are offering the iphone 4 and 4S for $50 and $150 respectively.

  • Report this Comment On June 09, 2012, at 10:15 PM, demodave wrote:

    FreeRange1 writes:

    "Virgin's best Android can hold its own against the iPhone any way you slice it..." - this is a totally ignorant statement by the author!

    It's not ignorant. It's incendiary. That's what Anders does.

    Now, we can debate whether trying to start fires is ignorant, and that is a whole different topic, but Anders does what he does intentionally. At this point, after reading so many similar commentaries, I feel OK saying that.

    Sadly, this particular Bylund Motley Fool piece isn't even entertaining. We are now looking at a whole new model for Apple to sell iPhones. Rather than prognosticating on the good or bad in the business model, we should give it a few months and see what actually happens.

  • Report this Comment On June 10, 2012, at 8:24 AM, pk22901 wrote:

    Aren't you forgetting eBay resale value?

    "If consumers ever catch on to the value of prepaid plans in a big way, or the networks simply get tired of trading rebates for far-out profits, then Apple would have to compete on a far too level playing field."

    How're those 1 yr old Androids selling on eBay?

    Prepaid will be an enormous advantage to Apple.

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