Apple's iPhone 6 Might Retail for $299 With a Contract

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Apple (NASDAQ: AAPL  ) has a history of being able to ask for (and receive) high prices for its devices. iPads still cost more than a variety of comparable devices from various competitors and MacBook laptops are priced higher than comparable Windows machines. But can the company get consumers to pay $299 for a new iPhone when its user base has become accustomed to spending $199 to upgrade?

"Our checks indicate Apple has started negotiating with carriers on a $100 iPhone 6 price increase. The initial response has been no, but there seems to be an admission that there is no other game-changing device this year," said Jefferies analyst Peter Misek, according to Business Insider

Whether Apple would want a higher price for the base model of the iPhone 6 or if the company expects to charge the premium only for the rumored larger "phablet" version of the device is unknown. There is some precedent for passing on a higher cost to customers for a device that straddles the line between a phone and a tablet -- Samsung's phablet, the 6-inch Galaxy Note 3, sells for $299 (with a contract) or $100 more than its 5-inch Galaxy S5. 

In the United States the biggest wireless phone companies, AT&T  (NYSE: T  ) and Verizon (NYSE: VZ  ) , as well as smaller player Sprint (NYSE: S  ) , subsidize the cost of phones, selling them to customers at a low up-front price but building the cost of the device into the price of a two-year contract.

T-Mobile, which is behind the big two but roughly equal to Sprint, does not use subsidies in the same way; it either charges more up front or spells out the monthly breakdown of phone charges to its customers.

Subsidies hurt the wireless companies

Neither Apple nor the various wireless companies spell out exactly how much they pay for an iPhone, but the deal clearly benefits Apple more than it does the wireless carriers, which have to sell the devices at a loss and wait to recoup their investment over the life of the two-year contract.

The 16GB iPhone 5S, which features a fingerprint sensor, costs Apple at least $199 to build, according to IHS, and it retails from AT&T, Verizon, and Sprint for $199. The iPhone 5C, which the three carriers retail for $99, only costs a little less, with IHS' teardown of the phone showing it costs around $176 to produce. 

The phone carriers make deals with Apple to buy a certain amount of devices whether they sell them or not. Apple is so powerful and has such a devoted following that it can largely dictate terms. 

When Sprint first became an iPhone carrier in 2011 the company detailed its deal to CNNMoney. According to the report, Sprint agreed to buy a set amount of phones that it estimates will cost around  $15.5 billion. "The company did not say exactly how many iPhones it would have to purchase, but it noted that its cost per added iPhone subscriber would be 40% higher than the average non-iPhone customer," CNNMoney reported.

That's a heavy price to pay but at the time Sprint executives acknowledged that offering iPhones was a way to retain and gain customers.

There are other options for smartphone users now as lower-end Android phones are where the real growth is, but iPhones are still a powerful lure to high-end customers.

How does this help Apple?

Apple sold 51 million iPhones in the fourth quarter of 2013, according to company filings. Imagine if it makes a deal with the companies selling its phones to charge customers $100 more and the parties split that extra money. For every phone Apple sells under that deal, the company would net an extra $50 (while also relieving some of the pain for its partners). If Apple sells even 30 million phones in a quarter it would take in an extra $1.5 billion -- or roughly $6 billion in a year [Editor's note: We had a decimal-point problem previously. We apologize for the confusion.]

If Apple makes an even better deal -- say for 75% of the cost increase -- the company would take in $9 billion. That may not be an enormous amount of money to a company that had $170 billion in net sales in 2013, but it's a lot of money and it's pure profit.  

Apple has its user base

Raising prices when cheaper Android-based phones have been driving growth in the smartphone industry may seem like an odd choice that's likely to cost Apple market share, but iPhone users have been especially loyal.

Some customers would of course switch premium phones (or wait longer to upgrade) if Apple raised the price of its phone to $299 with a two-year contract. But if the $299 price were attached to a super-premium model -- be it a phablet or something else -- and a new $199 model was also offered, Apple might be able to have its cake and eat it too. That's a risky strategy -- the last thing Apple wants people to think is that a new release is a "budget" or "low-end" phone. That concept clearly failed with the struggling iPhone 5C.

But if Apple releases a new phone in two sizes, it should be able to command a premium price for the bigger screen while not casting the regular size phone as inferior. That will leave Apple with the $100 premium on some sales and protect the value proposition the company has in people wanting its new phone as soon as it's released.

Apple has to tread carefully here because there are good alternatives to iPhones so the company needs to avoid opening that door for its most loyal customers. If Apple handles this well and there is a perceived value for the extra $100 that doesn't take away from the glow of owning the lower-priced new phone then the company should be able to grab some significant extra cash.

The biggest thing to come out of Silicon Valley in years
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 16, 2014, at 8:24 AM, guptaraja wrote:

    your calculations are not right..

    30 million * 50 *4 - is 6 billion and not 600 million

  • Report this Comment On April 16, 2014, at 10:24 AM, artlaz wrote:

    I think they'll start the 6 line with 32GB of storage making it equal in price to the 5S 32GB model. The net effect will be margins are maintained, despite the more expensive components.

    Down the line, when the 6 is a year old, they can always come out with a 16GB less costly version.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2917038, ~/Articles/ArticleHandler.aspx, 8/28/2015 10:55:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Daniel B. Kline

Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.

Today's Market

updated Moments ago Sponsored by:
DOW 16,598.21 -56.56 -0.34%
S&P 500 1,983.93 -3.73 -0.19%
NASD 4,803.94 -8.77 -0.18%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 10:39 AM
AAPL $112.19 Down -0.73 -0.65%
Apple CAPS Rating: ****
S $5.24 Up +0.17 +3.35%
Sprint CAPS Rating: **
T $33.20 Down -0.24 -0.72%
AT&T CAPS Rating: ****
TMUS $39.94 Down +0.00 +0.00%
T-Mobile US CAPS Rating: ***
VZ $45.79 Down -0.40 -0.87%
Verizon Communicat… CAPS Rating: ****