By Daisuke Wakabayashi And Thomas Gryta
In recent years, Americans have been spared the sticker shock of
paying full price for a new iPhone because wireless operators
offered upfront discounts approaching $500 a phone.
But Apple Inc. faces an uncertain new environment this week as
it prepares to unveil new--and what are expected to be more
expensive--iPhones. Carriers have been weaning consumers off
subsidies and getting them to pay full price for new devices.
In most cases, consumers pay for the phones over time, the way
many people buy new cars. The carriers say they come out ahead by
eliminating the subsidies and allowing consumers to buy new phones
without upfront payments.
The approach poses risks for Apple. Its phones are most popular
in the countries where carriers subsidize the purchase price,
principally the U.S. and Japan. Eliminating subsidies will allow
consumers to see more clearly the price difference between Apple
and rivals and could expose the iPhone maker to more of the pricing
pressure plaguing its competitors.
"All those devices that are $600 or $650 do well because of the
subsidies," said Carolina Milanesi, chief of research at Kantar
Worldpanel. "Customers are starting to pay more attention to the
prices."
Ms. Milanesi said the new installment plans should help boost
U.S. sales of less expensive smartphones that use Google Inc.'s
Android operating system because customers will be drawn to phones
with similar specifications as the iPhone at half the price.
Research firm IDC estimated that the world-wide average selling
price of an iPhone will be $657 this year, compared with $254 for
Android phones.
Apple is expected to unveil new iPhones on Tuesday with 4.7- and
5.5-inch displays, up from 4 inches for its current models.
Analysts predict that Apple will charge as much as $100 more for
the 5.5-inch model than the $649 base price for its current
top-model, the iPhone 5S.
The four major U.S. wireless carriers-- AT&T Inc., Verizon
Communications Inc., T-Mobile US Inc. and Sprint Corp.--began
promoting no-subsidy installment plans last year. The plans aim to
shift subscribers off a subsidy system that allowed them to buy a
new iPhone 5S for $199, less than a third of the list price, with a
two-year contract. Analysts expect the carriers to feature the new
plans in marketing around Apple's new phones.
Apple and the carriers declined to comment.
The old system worked well for Apple. In the U.S. and Japan,
where carriers have been offering the heaviest iPhone discounts,
Apple's smartphone market share exceeds 40%, according to comScore
and MM Research Institute. By comparison, iPhone's global market
share was 12% in the second quarter, according to research firm
IDC.
Under a subsidized plan, a customer typically pays $200 up front
for a base model of the iPhone 5S and roughly $80 a month for a
common service plan. The carriers make back the cost of the
discount through the monthly fees.
A typical new installment plan charges $27 a month for two years
to finance the same phone--about equal to the base price of the
phone--plus $65 a month for similar service. Consumers own the
phone outright after the two years and can continue using it by
paying only for the service.
Over two years, consumers tend to pay more to the carriers under
the new plans.
Consumers who have paid off their phones will have to decide
whether having the latest device is worth increasing their monthly
bills. For a family of four, a set of new iPhones would add more
than $100 to the monthly bill.
The move away from subsidies was sparked by T-Mobile, which also
started offering a program last year for customers to trade in
their phones after a specified period and begin financing a new
device. All the other major carriers now offer similar plans but
also have the option of traditional contract-based plans and
pricing. As of the end of June, about 44% of AT&T's U.S.
postpaid smartphone users were on no-subsidy service plans.
Apple Chief Executive Tim Cook said the company already was
seeing a move away from subsidies. In the quarter through June,
fewer than 25% of iPhones were sold on a subsidy plan. "That number
is markedly different than it would have been two years ago," he
told analysts in July.
Mr. Cook said the installment plans make it easier for customers
to switch to new phones, so "that makes us incredibly bullish that
customers on those plans would be very likely to upgrade when we
announce a new product."
By eliminating the $200 upfront fee to buy a new high-end
iPhone, more customers may be interested in an iPhone because the
financial sting is spread over monthly payments. Carriers also are
offering customers who remain under old contracts--who would
normally have to wait to get new phones--options to upgrade to new
handsets if they switch to installment plans.
"In the short term, getting a device for zero down is only going
to be helpful," said Ben Schachter, an analyst with Macquarie
Capital. "Over the long term, people may start to pay more mind to
how much they are paying each month."
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