iPhone U.S. dominance due to carriers' pricing strategies
U.S. mobile carriers give high-priced phones an edge by not discounting calling and data plans for cheaper hardware
Apple's iPhone dominance in the U.S. is largely due to carriers suppressing market economics, an analyst said today.
U.S. carriers artificially dampen demand for lower-cost smartphones by disconnecting calling and data plan prices from the hardware. The result: No matter which smartphone the customer buys, the total cost of a two-year data plan is nearly the same, said Sameer Singh of Tech-Thoughts.
In countries where contract plans prices are dependent on the smartphone's cost, Apple's share of the market is weaker, Singh maintained.
"The scale of the difference between the iPhone's presence in the U.S. versus Europe suggests that [data plan] pricing plays a significant role," said Singh in an email Tuesday.
In a blog post today, Singh analyzed plan pricing in the U.S., the U.K. and Australia
According to Singh, since late 2011, when Apple released the less-expensive iPhone 3GS and iPhone 4 globally, the iPhone's share of the U.S. market has been between 10 and 15 percentage points higher than in the U.K. and Australia.
He attributed that to the pricing structure of U.S. calling and data plans, which don't gibe with smartphone costs. While the highest unsubsidized price of seven handsets from Apple, HTC and Samsung was a whopping 71% more than the lowest-priced model, the difference between plan costs over 24 months was a measly 14%.
"This gives high-end smartphones, including the iPhone, an unnaturally high share of the smartphone market," Singh said.
That's not the case in the U.K., where -- as in other European countries -- competitive carriers more closely match the price of a two-year contact package to the price of the smartphone.
"The unsubsidized prices of devices are far more in sync with the relative contract pricing -- the contract [cost] of an $820 iPhone 5 is 91% higher than that of the $224 Samsung Galaxy Ace 2 -- which leads to a far more natural price-demand relationship," Singh said.
Because price-sensitive U.K. consumers are more likely to opt for a cheaper handset like the Galaxy Ace 2, which is accompanied by a two-year outlay half as much as the iPhone 5, it's no surprise that the latter has a lackluster share of the European market.
In Australia, carriers use a mixed model that falls somewhere between the U.S. and the U.K., said Singh, by basing the monthly cost of a contract on the smartphone's price, but only until the total value of the calling and data contract reaches a certain point. The bottom line: A difference of 61% between the lowest and highest two-year costs, but some incentive to purchase a higher-priced handset.
"The iPhone's market share in the U.S. is a direct outcome of a pricing model that encourages purchases of high-end devices over mid-range or low-end devices," Singh concluded.
In the 12 weeks ending Nov. 25, 2012, Apple scored a 53% share of U.S. sales, largely on the back of the then-new iPhone 5, said research firm Kantar Worldpanel Comtech last year. Metrics company comScore, however, recently put Apple's share of all U.S. smartphone subscribers at 38% for the three months ending January 2013, ahead of all other handset makers but behind Android's overall share of 53%.
Unless U.S. carriers change their tune -- perhaps not possible considering the deals they've struck with Apple to purchase set numbers of iPhones -- the rumored lower-priced iPhone won't change that.
But a lower-cost Apple smartphone -- Singh speculated that it would replace the iPhone 4 in Apple's current line-up, and be priced at least as high as the $329 iPad Mini -- could add to the Cupertino, Calif. company's market share in, say, Europe, where contract costs are more in line with the price of the handset.
The wildcard in the U.S., said Singh, was T-Mobile, which will start selling Apple devices, presumably iPhones, this year. T-Mobile is notable because it's dropping subsidies -- requiring customers to pay full, unsubsidized prices, which for the iPhone start at $649 and climb to $849 -- but compensating with unlimited no-contract data plans and handset upgrades at any time.
Because T-Mobile asks customers to finance the smartphone purchase in monthly installments, it's more closely synchronizing the two-year cost with the price of the device. Lower-priced smartphones, in other words, result in lower monthly payments, and less paid out of pocket over a 24-month period.
If T-Mobile's strategy works, AT&T and Verizon could follow: CEOs of AT&T and Verizon told the Wall Street Journal in January that they're watching their rival's experiment, and could mimic it if customers take to the idea.
T-Mobile has slated an announcement for Tuesday, March 26, where it's expected to formally debut its no-contract, no-subsidies model.
A lower-priced iPhone could play well at T-Mobile, and if others emulate that carrier, be a necessity for Apple to maintain its market share position. Apple, of course, has been mum on plans for the speculated device, but Brian White of Topeka Capital Markets was adamant last Friday that one will come.
"We're now sure that a cheaper iPhone will come out this year, also in June along with the iPhone 5S," said White in an interview last week.
"The data shows that U.S. consumers don't consider long-term costs, [which is] perfectly rational because the long-term cost is the same, irrespective of the device chosen," said Singh. "However, in other countries, the long-term cost depends on the chosen device, which is why it becomes a major factor driving purchases."
And the high price of the iPhone, which has pushed Apple's revenue and profit to record heights, may not be able to withstand a spreading of that model to the U.S.
"Carriers in Europe and other countries offer many plans that don't have any upfront cost, so the monthly expenses certainly seems to be having an impact," Singh said.
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is firstname.lastname@example.org.
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