Most mobile device users believe that their iPhone 5 only costs $199 per unit with a 2 year wireless contract, however, the phone actually costs over $600 per unit with the mobile carrier paying the difference to the mobile manufacturer. Wireless carriers provide this rebate (or subsidy) to the purchaser/subscriber because the carrier will make up their contribution to the handset via the long-term voice and data services that the subscriber will consume. Generally, the payback period for this subsidy is over within the first six months of a voice/data subscription because the incremental cost of new subscribers is quite small. On Tuesday this week, the forth largest mobile carrier, T-Mobile, has now announced the elimination of its subsidy program as a way to increase its profitability. Thus, any new subscribers to its existing base of 33 million users will now be responsible for the entire cost of their phone. While the T-Mobile move may be specific to its ongoing merger with MetroPCS, the move to end phone subsidies may be a test case for other larger carriers to follow suit if T-Mobile’s profitability is enhanced.
With the potential for other large carriers to also end purchase subsidies if T-Mobile is successful, it may create some slack in demand for high-end phones if consumers are completely on the hook for the cost of their devices in the future. The noticeable outliers on price per handset are Apple’s (AAPL) iOS phones at almost $700 per handset according to IDC. Windows’ related phones, which are sold by Nokia (NOK), are also at risk with average selling prices near the $400 per handset range. Lower priced handsets using Google’s (GOOG) Android operating system (mainly sold by Samsung) could benefit (see our article on Android market share) from the move. Blackberry (BBRY) units could also make a comeback if handset subsidies are whittled down across the industry.
While T-Mobile’s subsidy elimination plan may be specific to the carrier for a variety of reasons, if emblematic of the start of an industry trend, this event could signify that lower priced handsets could experience increased demand from price sensitive consumers with slack left in demand on the high end.
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