Things will get interesting on Thursday when Verizon begins offering new data plans that put an end to the illusion of $199 iPhones. Instead of Verizon willing to take a subsidized hit of several hundred dollars on every smartphone in exchange for a two-year commitment, the new pricing offers simple contract-free relationships. Customers either bring their own devices or pay them off in subsequent months.
We're not talking about some groundbreaking approach here. This is essentially AT&T's (NYSE:T) Next model being embraced by its biggest rival, just as AT&T copied it from smaller carriers.
However, this is still a game changer for the industry -- and not in a good way if you happen to be Apple. After all, Apple's iPhone 6 may start at $199, but the actual starting line for the iconic smartphone is $649 if you're talking about an unlocked and contract-free handset. Verizon and AT&T customers ignored the wide gap, accepting that the price to be paid for paying high monthly service rates was that the carrier was making back the $450 difference along the way. This helped shape the consumer mind-set of updating a smartphone every two years, because if that didn't happen they would be overpaying when the upgrade window opened. All of that changes with the new pricing plan at Verizon.
There is now an incentive to hold on to phones longer since folks will be either buying them upfront or paying them off in a set number of monthly payments. There is now an incentive to smoke out older or secondhand handsets to take advantage of lower carrier rates. These developments may be bad for all of the handset makers, but the fact that the initial pricing is a bigger consideration in the purchase decision could hurt Apple in a world of cheaper Android devices.
This could be a dinner bell for Xiaomi, the Chinese darling that sold 61 million Android-flavored smartphones last year by offering the slick features of leading iPhone and Galaxy devices at a fraction of the price. Xiaomi announced plans to enter the U.S. market earlier this year, but not for its flagship smartphone product line. The initial emphasis is on 4K TVs, routers, and air purifiers, but you know that Verizon's move will make it that much easier for its head-turning Mi handset to make some noise with its inevitable stateside release.
That leaves us with Apple as the world's most valuable consumer technology company relying on the iPhone for nearly two-thirds of its annual revenue. As the curtain peels back on the $199 iPhone -- making that price point seem more of a down payment than an actual purchase -- it's hard to fathom how Verizon's new strategy is a positive for Apple. It's now a matter of assessing how negative it will be.
One can rightfully argue that AT&T Next has been around since late 2013 and Apple has only seen its iPhone sales soar in that time. That's true, but as Verizon and AT&T push more users away from older legacy models to the new normal where folks pay for their devices in a more transparent model it will be a problem. Upgrade cycles will be ignored. Hardware prices will be checked. Pricing elasticity will be tested. Apple will need to focus on raising the bar, because that may be the only thing that it can afford to raise in the near future.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple and Verizon Communications. The Motley Fool owns shares of 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.