Apple, Inc.'s iPhone Business Won't Be Devastated by the End of Subsidies

The end of subsidies could give Google the advantage over Apple.

Apr 23, 2014 at 9:35AM

The end of smartphone subsidies poses a threat to Apple's (NASDAQ:AAPL) iPhone business, according to an article published by The Wall Street Journal on Tuesday. Major U.S. wireless carriers are quickly moving their subscribers to non-subsidized plans, threatening Apple's core business in the process.

By just about any measure, Apple's flagship iPhone 5s is expensive. Google's (NASDAQ:GOOG) Nexus 5, despite offering a larger screen and comparable hardware, retails for only about half as much. In the past, carriers had borne the burden, paying for their subscribers' handsets -- in the process, obscuring the relative costs of various models.

If subsidies go away, consumers could opt for cheaper phones -- like the Nexus 5 -- in place of more expensive ones from Apple. A recent survey, however, suggests that won't be the case.

The end of subsidies
The Wall Street Journal's argument is hardly new -- in fact, since last November, I had been warning that the loss of subsidies could disrupt Apple's business. At the time, the argument appeared convincing -- if consumers were rational, they'd buy a cheaper, "good enough" device in place of a more expensive handset from Apple.

If a consumer, opting for one of the new, unsubsidized plans, purchased a Nexus 5 up front (rather than an iPhone 5s), they could save themselves a great deal of money, cutting the cost of his monthly wireless bill by as much as 50%. In contrast, under the old, subsidized model, the cost savings would be minimal -- Google's phone would have little advantage over Apple's flagship.

Consumers choose more expensive phones
But the data doesn't support such notions. According to a recent survey by Consumer Intelligence Research Partners, smartphone buyers on unsubsidized plans actually choose more costly rather than less expensive handsets. How can this be? Shouldn't they be looking to save money? Perhaps the best explanation is one that considers cash flow.

Plans that use subsidies often require up-front payments of several hundred dollars -- getting Apple's flagship on a subsidized plan usually entails coughing up $199 at the time of purchase. In contrast, unsubsidized plans often (though not always) allow subscribers to get the same phones for no money down -- instead, the cost is spread out over monthly installments.

Purchasing a more expensive phone results in higher monthly payments, which makes it a less than prudent financial decision. But given that some three-quarters of Americans are living paycheck to paycheck and about a quarter of the country has no savings whatsoever, any plan that gets rid of large, up-front payments is obviously appealing. In that context, Google's cheaper phone (which requires a one-time payment of $350) is less affordable.

The risks to Apple remain
Of course, the trend away from subsidies is not without its risks: Under a subsidized plan, the monthly cost stays the same even after the two-year contract expires. This makes regular, biennial smartphone upgrades the norm -- your bill isn't dropping anyway, so why not upgrade your phone?

In contrast, unsubsidized plans become less costly after the handset itself is paid off -- getting a new phone requires a conscious decision to raise one's monthly bill, perhaps by a substantial amount. As unsubsidized plans become the norm, investors in Apple should be prepared for longer upgrade cycles, though, to be fair, that too is unclear. Unsubsidized plans allow subscribers to trade in their handsets after a year or less -- extending their monthly payments but allowing them to get the latest and greatest phone.

Overall, while there are risks, it doesn't appear that the move away from subsidies will devastate Apple's iPhone business.

Apple's next legendary product
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.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Google (C shares). 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers