12 August 2012

Why the iPhone is so cheap.

Walk into a Verizon or AT&T store and you can pick up the latest iPhone for a couple hundred bucks. If you are willing to settle for the previous gen model, you can cut the price in half. And when we all line up to buy the next iPhone, we need to give a big thanks to the people responsible for making this amazing device so inexpensive: Google.

The iPhone is by far Apple's most profitable product. While you may only pay two Benjamins for a new one, Apple is actually getting paid closer to six. How? Pre-paid services have unmasked the true cost of each device and have shown that an Android device running 4G costs a carrier about half the cost of Apple's hardware. Yet, when you visit a carrier, they both cost about the same amount.

How is it possible that carriers can sell a device that costs twice as much for the same price? By making the Android customers pay for it. It is well known that Verizon has been pushing customers to buy Android devices instead and it is not simply because they want everyone to have a fast LTE connection. Verizon makes approximately three hundred dollars more profit on a two year contract with a Samsung Galaxy SIII than they do on an iPhone. If all of Verizon's customers purchased Android devices then Verizon would be considerably more profitable and could consider lowering their monthly rates, but that additional profit it used to offset the premium required to sell the iPhone - so do not expect to see the monthly rates decreasing. In fact, we are seeing the price move up, instead.

Verizon and AT&T both had sizable profits this past quarter following a period of lower profits or losses, in the case of AT&T. Of course they did. No one is buying the iPhone right now and Android has four times the number of sales. The next quarter and Christmas will show a significant decrease in profit as these companies need to shell out huge dollars to Apple for the new version of the iPhone as anyone upgrades to the latest model.

Carriers could easily make it more equitable if they wanted to. If they doubled the price to buy an iPhone then the profitability point for both would be similar. However, no carrier (so far) has been willing to make that leap. Verizon has grumbled about potentially raising the price, but if they were the first to jump then all of the Apple fans would run to AT&T or Sprint. It seems likely that if anyone raises their price it will be a small change - perhaps $50 at a time to allow the competitors to slowly follow suit. Still, there is no indication that will be happening any day soon.

So, thank you, Google. Thank you so much for creating the Android market. Sure, you outright copied Apple's amazing concept, but by doing so you have allowed consumers to enjoy their products at a much reduced price. Sure, your customers are paying more than they should, but it seems like a small price to pay for Apple fans to get their favorite product at a discount.