Why the iPhone is bad for society

In other words: the high-profit, high-subsidy, long-contract model

(Jacky Naegelen/Reuters)

I was hoping not to write anything more about the iPhone after the flurry of activity last week, but one thing about the device – not just the new iPhone 5 model that sold more than five million units over the weekend, but all versions – still bugs me. The price.

As we learned in the patent case against Samsung, Apple is making a huge profit on the iPhone. According to court documents, the margin is double on what the company earns on the iPad. As Reuters puts it:

Apple Inc earned gross margins of 49 to 58 percent on its U.S. iPhone sales between April 2010 and the end of March 2012.

Between October 2010 and the end of March 2012, Apple had gross margins of 23 to 32 percent on its U.S. iPad sales, which generated revenue of more than $13 billion for Apple, the filing said. Apple does not typically disclose profit margins on individual products.

As I wrote recently, the reason Apple makes so much more on the iPhone is because it isn’t really selling the devices to consumers, it’s selling them to wireless carriers. The carriers turn around and sell the phones at a discounted rate in exchange for the subscriber signing on to a contract. In Canada, this inevitably means a three-year commitment.

To recoup the money they pay to Apple, the carriers also charge customers a certain amount for their monthly services. The naturally occurring question is thus: if the phones were less expensive, wouldn’t the monthly plans also be cheaper? Let’s do the math.

According to iSuppli’s tear-down estimate, the actual manufacturing cost of the 16-gigabyte version of the iPhone 5 is $207, which is a few bucks more than previous models. In the U.S., Apple is selling said model for $649. Using the 49-per-cent low-end of the court-reported margin, that means the company is making $318 profit on each device, after R&D, shipping, marketing and other costs are accounted for. Those costs appear to come to about $124, which means that the total cost of producing a 16GB iPhone for Apple is about $331.

What if the company extracted a lower profit, like it does on the iPad? Applying that low-end margin of 23 per cent, the iPhone 5 would sell for $410, or $240 less than what it actually goes for.

With a price tag of about $400, the cost of the device would begin to approach a level where contracts might not be necessary. More consumers would be willing to swallow the whole cost of the device up front, while carriers also wouldn’t have to pony up as much of a subsidy. Theoretically, that would mean monthly subscription fees could be lower. If more consumers were contract-free, they would certainly have more pricing power over their wireless carrier than they currently do.

The high-profit, high-subsidy, long-contract iPhone model—which, to be fair, every other cellphone manufacturer is dying to emulate—is therefore likely keeping monthly subscription rates higher than they should be. The benefits of having cheaper telecom services, of course, don’t really need to be explained: more usage, more diffusion, more productivity, more enabling of other capabilities. Expensive smartphones, ergo, are bad for society.

To put it another way: imagine if computers had stayed comparatively expensive. Where would we be as a society in that case?

Of course, all of this flies in the face of other economic principles, such as basic supply and demand. It’s also a foundation of our society that a supplier of a good product should be able to charge as much for it as people are willing to pay. With the brisk sales that Apple is doing on the iPhone, there’s obviously no shortage of demand.

It’s just too bad those buyers aren’t aware of how much better things could be.




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Why the iPhone is bad for society

  1. blackberry, samsung, motorola, htc, they all charge comparitive prices for their premium smartphones and were doing so before Apple even began making phones. our cellular rates are high in canada because of network costs, we have one of the largest, if not THE largest geographical network in the world and a small population to pay for it. unless we grow to a nation of 100-300 million people ( which will never happen) cellphone rates won’t change much

  2. I can’t see that Apple reducing the price of their phone would have any effect on monthly contracts or service quality.

    The telecom companies can’t be complaining either about the price of the phone. If anything, keeping the price high forces lower income customers into longer term contracts and drastically expands the telecom company’s customer base. If anything, telcos are loving the fact that the average consumer, who *needs* the latest iPhone, can’t afford it – otherwise, they could just snag a month-to-month plan and hop from telco to telco depending on who’s offering the best service for the cheapest price.

    For the most part, the service provided hasn’t changed dramatically in the last decade. Even pre-iPhone contracts were continually rising while service stayed the same. It was the increase in phone development that forced telcos to make updates to their infrastructure. For most spots in Canada, the general service updates have been the bare minimum just to keep up and be able to offer the higher-end phones. Sure, there’s now more access to 3/4G, but head 2 or 3 hours north of Toronto and you’re essentially in a dead zone for decent service. There’s even spots inside major Canadian cities where service is still atrocious (like at home, for some of us).

    The only loser for Apple keeping its prices high is the consumer who’s forced to sign up for a long-term contract and pays out x-amount more than the phone is worth over three years. The service providers will always be on-par with oil & gas – always a reason to increase the price, but never one to reduce it.

  3. “bad those buyers aren’t aware of how much better things could be” – So what you suggest, people dont buy iPhones? come on street to protest that some company is charging more..why cant you leave a company to work the way it is. Why everything has to have a socialist outlook? who is asking you to buy an iPhone at the first place?. There are 20+ models available other than iPhone where your theory works. Stop blaming people and accept that there is a cost for everything. Let the free market prevail…

    • It isn’t socialism to go to a competing phone maker because Apple is gouging.

      • Or to decide, as an individual, that a social benefit is more important in your purchasing decisions than a monetary one.

    • Criticizing Apple is socialist? You’ve got a funny definition of socialism.

  4. This begs the question, why did you generally conclude that an iPhone is worth buying? Assuming for most customers, money does matter, it hardly makes sense to recommend an iPhone when other manufacturers have caught up and the difference is one thing…price. Apple is still charging consumers an extra $100-200 for the label, not because it does anything especially better anymore.

    Funny, it used to be that Apple could make commercials making fun of Microsoft, while Microsoft had to just ignore it and hope people wouldn’t see the truth behind it. Now Samsung makes those type of commercials about Apple.

    At this point, the “sure, buy the iPhone 5″ should have a few caveats. 1. Price is no object and you don’t necessarily care how it compares to other phones 2. You enjoy the “prestige” factor of having an iPhone or 3. All the stuff you own is by Apple, and you want to KISS…keep it simple, stupid. If these factors do not apply to you, then it would be foolish to choose the most expensive because it has 700,000 apps to chose from, compared to Androids 675,000 (literally – your original article made too much of the so-called Apple app lead).

  5. Dumping subsidies and paying a lot more up-front for a phone might sound radical, but outside the U.S. it’s pretty common. “The North American markets (U.S. and Canada) are really the only two in the world that have this complete addiction to the phone subsidy,” said Elliot Noss, CEO of Ting, a new no-contract carrier that bills customers based on their usage each month.

    Indeed, in Europe, mobile phone plans with contracts are much less common than in the U.S. According to a report from Deloitte, in 2009 87% of customers were prepaid in Italy, 66% in the U.K., 55% in Germany, and 42% in Spain. That compares to just 22% in the U.S.

    These countries also typically have much lower monthly bills from their mobile phone providers. According to data from Bank of America Merrill Lynch, the average monthly revenue from U.S. customers for carriers is $50.67. Compare that to $24.53 in Italy, $30.99 in the U.K., $29.10 in Spain, and just $20.42 in Germany. Europe’s overall average is $30.83, compared to the North America’s $51.40.

    Of course, without a contract and carrier subsidies, many popular smartphones would cost hundreds of dollars more up front. The aforementioned iPhone 4S costs a whopping $649 “unlocked.” The Motorola Droid RAZR Maxx costs the same off-contract.

    But if subsidizations were gone on a massive scale, might that drive competition and innovation to lower those off-contract prices?

    http://www.foxbusiness.com/technology/2012/05/22/are-carrier-subsidies-hurting-innovation-and-driving-up-mobile-phone-costs/

    • It’s our buy now, pay later attitude. We live on credit here. Pay for a car over 84 months. Pay for a house with only 5% down. Pay for everything on plastic and just carry the balance, paying interest each month. Hundreds of millions of North Americans live this way. So of course, we’ll take a “free” phone (or a discounted iPhone) and just pay the difference over the length of the contract, with a steep hidden penalty I’m sure.

  6. Yes, theoretically, that would mean monthly subscription fees could be lower. Unfortunately that is not the reality. I own my device and tried to negotiate lower monthly rates by offering to sign a contract with no subsidy. None of the carriers went for it. Might as well subsidize the device if you end up paying the same rate.

    • Exactly. I would love to buy my phone upfront, not be on contract, and pay lower rates. But it simply cannot be done in North America. You end up paying the same fee as people who get the subsidized phone and all you’ve got to show for it is an unlocked phone you can use in Europe while on vacation.

      • Wind mobile doesn’t subsidize phones much and offers much cheaper plans.

        • Total unrelated side note. Its funny that you have outlasted the other two Andrew’s at Macleans.

          • How is it unrelated? He’s pointing out a company that offers at least part of what you’re looking for.

          • I think that “Non_Partisan” was trying to let people know that he was making an unrelated side note, rather than saying “Andrew_notPorC” was making an unrelated side note.

    • Precisely, even after the 3 year contract term is up, they keep charging you the same monthly rate. One would assume that after the contract is done, the phone is paid for, and they would lower your monthly fee. HA! I’ve tried to argue this; they flat out refuse.

  7. All phone makers sell their devices to the carriers who in turn sell to consumers in exchange for contracts. So I don’t really get your argument?

  8. not sure why we continue to read and write these articles….as stated below…there are many good quality phones on the market…choose the one you want (and the one you want to be seen with) and pay the piper….the rates for ALL cellular and smart phones are very high in Canada…..one choice is to sign up with a secondary carrier with less than excellent coverage ……

  9. smart phone…..dumb people!!!

  10. Apple have been making excessive profits on everything they have produced from day one. As PT Barnum once said: “There’s a sucker is born everyday ” and now he would add ” suckers world wide”. And we wonder why people are deep into debt and may one day retire like the 58% of retirees even deeper in debt because of their addiction to name brand gadgets.

  11. The USA has a national robotics initiative. I figure we could use such a thing. UAV spraying of fertilizer and seeds would be ideal for seeding bogs with sphagnum fuscum clippings or spores, if these can be “produced” somewhere easily. Bogs and permafrost aren’t farm-equipment friendly or personnel friendly. Telerobotic treatment of pandemic patients is preferable to infecting doctors and nurses…if we want to build a manufacturing sector we need R+D. With the deficit I suggest taxing finance and petro to create new sectors; finance and petro are capable of owning them.
    I really wanted a job in Edmonton, fixing robots. I’d love to work for such a Stimulus-funded job.

    • I assume Apple clients are brainwashed into using inferior products. That is bad if they dono’t switch-over. I wonder if China will hack them to death like China killed Nortel.

  12. The locked in contract, the lack of an unlocked phone. keeps me away from ever buying this thing.

  13. Greedy Apple monopolizing capitalism. whatever

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