Ever since the iPhone first came out, many cost-conscious consumers have found it to be prohibitively expensive. Now, Apple (Nasdaq: AAPL) is making a strategic shift to open up the iPhone to an even wider audience of those who are smarter about understanding what they're spending. That's good news for consumers, but it poses a big threat to AT&T (NYSE: T) and Verizon (NYSE: VZ) -- and Verizon has responded in exactly the wrong way.
The endless march of technology
New technology has always had an adoption curve. Early adopters are willing to pay nearly anything to get their hands on the latest gadgets. Once the best products rise to the top of the heap, another wave of more patient buyers comes in to grab up the most reliable top performers of the bunch. Last but definitely not least, cost-conscious customers wait for prices to come down to snap up bargain-priced devices, giving up the state-of-the-art for the reasonable performance that older technology still provides.
For computer makers Dell and Hewlett-Packard, the inexorable march toward technology commoditization has given them direct struggles to sell their products. But with smartphones generally and the iPhone in particular, exclusive deals from mobile carriers and subsidized phones with locked-in contracts obscured the true cost for many consumers, leading to delays in the playing out of the product cycle.
Here's how it worked: AT&T -- and later, Verizon and Sprint Nextel (NYSE: S) -- sold iPhones at relatively low prices. Yet with the phone came a commitment to paying for two years of service at arguably inflated rates. By locking customers in and charging big early-termination fees to get out, Apple collected much higher prices for its iPhones from the carriers, while the carriers eventually got paid back through contract payments.
Early adopters may not have cared about all that. But the bargain crowd looked beyond the $199 upfront cost of the phone to the potential of paying as much as $2,600 for two years of cell-phone service -- and happily waited for a more reasonable solution to present itself.
Rise of the bargains
Now it appears that Apple is finally doing what it should have done all along: pitting providers against each other to make as many people as possible interested in buying the iPhone. With both Leap Wireless' (Nasdaq: LEAP) Cricket and Sprint's Virgin Mobile about to offer the iPhone 4S -- the newest model currently available -- Apple is signaling a desire to focus price competition on the service side of the smartphone equation.
Cricket and Virgin offer a trade-off. You'll pay Cricket $500 or Virgin $650 for an iPhone 4S, but you won't be locked into expensive contracts. Cricket offers an unlimited plan for $55 per month, potentially bringing the two-year service cost down to $1,320. At $30 per month for unlimited text and data, Virgin is even less expensive -- $720 for service or $650 for a Virgin iPhone.
Nothing's stopping AT&T and Verizon from making similar moves. Instead, though, Verizon decided to give up on its low-end users by implementing its Share Everything plan, which will eliminate limited-minute voice plans in favor of more expensive unlimited-voice plans. Many expect AT&T to do something similar in the near future.
What should you do?
High-end users who'd find the Cricket and Virgin offers insufficient will probably be happier to stick with AT&T, Verizon, or Sprint's own offerings. It's far from clear whether Cricket or Virgin will offer the iPhone 5 as quickly as the three premium carriers, which could be a big sticking point for those who've gotten used to swapping up for upgrades every two years.
But for price-conscious shoppers who've avoided iPhones because of the huge expense of service plans, Virgin and Cricket could well change things. More competition among mobile providers is good news for customers -- and for Apple.
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