Verizon may spend more than $5 billion subsidizing iPhone sales in 2011

Posted:
in iPhone edited January 2014
Analysts say Verizon will spend billions this year to make it easy for customers to sign up for data contracts with Apple's iPhone.



According to a report by Bloomberg, Verizon's estimated $3 to $5 billion in iPhone subsidies will initially cut into the carrier's profits in the hopes of adding millions of new smartphone users to its subscriber base.



Verizon to outpace AT&T in subscriber growth for the first time since 2008



John Hodulik, the same UBS AG analyst who said he expected iPhone "to be the dominant device at Verizon as soon as it?s launched, and, I think, cannibalize the other devices they sell," estimates that Verizon may sell 13 million iPhones this year with a device subsidy of $400 each. That would amount to $5.2 billion.



As a consequence, Hodulik said, ?we expect margins to be down pretty meaningfully in the first quarter and second quarter."



Verizon will earn back the value of those subsidies in its two year contracts, which run between $70 and $120 per month for packages of voice, data and text messaging. Tethering contracts add another $30 per month per smartphone user.



Across two years, carrier charges for a smartphone (without tethering) amount to between $1680 and $2880 per user, making the initial investment in subsidies well worth the $28 to $49 billion Verizon would rake in from serving all those new iPhone users over the next two years.



Verizon's subsidized iPhone sales should help it add 2.1 million new subscribers this year, Hodulik said. In contrast, AT&T is estimated to only add 650,000, making this year "the first time that Verizon?s subscriber growth will outpace its largest rival since 2008."







Competition may cut iPhone subsidy



James Ratcliffe, an analyst at Barclays, estimates that Verizon will sell just 9 million iPhones this year, spending $350 to subsidize each sale, for a total of $3.2 billion.



Ratcliffe also expects AT&T to sell just six million iPhones this year, down from around 15 million last year. He also figures that AT&T's subsidy will drop from $400 to $350 per device due to the end of its exclusive deal with Apple.



However, Verizon was rumored to have asked Apple to keep the iPhone exclusive to it and AT&T, locking out Sprint and T-Mobile from also carrying it in the US.



Subsidies hide hardware costs



The report cited iSuppli analyst Tina Teng as saying that the iPhone commands a $400 subsidy that's higher than most other smartphones, which may range from $200 to $400. She expects Verizon will pay the same subsidy AT&T did, but added that subsidies in general should fall as more smartphones enter the market.



Subsidies tend to erase the differences in upfront cost among mobile phones, but by negotiating a higher subsidy due to the appeal of the iPhone, Apple can make it even harder for other phone makers to compete in a pure "race to the bottom" in cost.



That's the opposite of what Apple experienced two decades ago, when it struggled to sell its premium priced, higher quality Macs against cheaper, simpler PCs that lacked features like motorized disk drives, built in audio and SCSI interfaces, and better operating system software. Apple's retail partners back then actively pushed would-be Mac users to buy PCs, creating a monoculture tended by Microsoft's Windows.



While many observers expected this situation to repeat with the arrival of broadly licensed mobile operating systems, a variety of situations have changed. Because mobile phones are sold through carriers who subsidize handset purchases to induce subscribers to buy more expensive data contracts, Apple doesn't have to feel pressured to deliver lower quality products just to stay in the game.



At the same time, Apple also benefits from the iPod's economies of scale, particularly in regards to RAM and application processors, making it harder for competitors to copy the iPhone at a significantly lower cost. Hardware makers selling devices running Microsoft's Windows Phone 7 or Google's free Android OS aren't selling devices that are noticeably cheaper than the iPhone.



Apple is now offering the iPhone 3GS for just $49 with a contact from AT&T, making it essential for Verizon to heavily subside new iPhone 4 sales in order to be competitive with AT&T's hardware prices, while also taking away much opportunity for Android or WP7 devices to compete purely on upfront hardware prices.



Smartphone data plans drive subsidies



Prior to the iPhone, Verizon and other carriers preferred to offer subscribers very cheap phones that could be offered for free with a $100 to $200 subsidy. Those phones did not encourage users to opt for more expensive data plans however.



By pushing more advanced phones to users with aggressive subsidies, AT&T and Verizon have been competing to grow the proportion of their smartphone users, and subsequently earn at least two to three times as much per subscriber per month.



Verizon tried to duplicate AT&T's smartphone success first via RIM's BlackBerry, then with Android phones last year, before deciding to join Apple in selling the iPhone, a move which is expected to be announced tomorrow.



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Comments

  • Reply 1 of 23
    MacProMacPro Posts: 17,868member
    AI is really cranking tonight!



    This article if true illustrates why Verizon shares may not climb too much but AAPL will.
  • Reply 2 of 23
    junkiejunkie Posts: 122member
    Verizon subsidizes every phone it sells so these numbers are kind of exaggerated.



    The interesting number is what sort of premium the iPhone is getting, not that we know that, and then multiply that times units. How much more is Verizon paying for an iPhone 4 versus a Droid X? $100 bucks more? Times 10 M devices that would be $1B upfront. $150 premium would be $1.5B.



    Also, some accounting should be made for all the ad spending Verizon has done for the Droid brand. Bet that ad spend is considerable and may be comparable to the premium they are spending on the iPhone.
  • Reply 3 of 23
    sheffsheff Posts: 1,407member
    Gonna be interesting to see what is unveiled tomorrow in terms of price and speed and antenna. Can't wait and can't believe how apple is making a carrier launch exiting headline tech news.
  • Reply 4 of 23
    MacProMacPro Posts: 17,868member
    Quote:
    Originally Posted by sheff View Post


    Gonna be interesting to see what is unveiled tomorrow in terms of price and speed and antenna. Can't wait and can't believe how apple is making a carrier launch exiting headline tech news.



    Don't mention the antenna!!!!
  • Reply 5 of 23
    I am wondering how legal it is to pay someone to lockout competitors. I understand exclusivity on a phone, but to say we'll pay you to not have it on T-Mobile or Sprint? That doesn't seem right.
  • Reply 6 of 23
    Ug. So the iPhone user gets screwed again with a $30 tethering deal.

    Why can't Steve just allow us to use them as WiFi hotspots like Android.
  • Reply 7 of 23
    penchantedpenchanted Posts: 1,070member
    Quote:
    Originally Posted by ghostface147 View Post


    I am wondering how legal it is to pay someone to lockout competitors. I understand exclusivity on a phone, but to say we'll pay you to not have it on T-Mobile or Sprint? That doesn't seem right.



    I doubt that is the way the contract is worded. It will speak only to the fact that Verizon shares a semi-exclusive carrier status with ATT for some period of time.
  • Reply 8 of 23
    pwjpwj Posts: 19member
    Quote:
    Originally Posted by AppleInsider View Post


    That's the opposite of what Apple experienced two decades ago, when it struggled to sell its premium priced, higher quality Macs against cheaper, simpler PCs that lacked features like motorized disk drives, built in audio and SCSI interfaces, and better operating system software. Apple's retail partners back then actively pushed would-be Mac users to buy PCs, creating a monoculture tended by Microsoft's Windows.



    There has, and always will be, high-end PC hardware priced similarly to Apple's hardware. Let's not paint all PCs with the stigma of being cheap and simple when plenty of them are not. (though there are plenty of crappily done PCs out there, for sure)



    And calling Macs "higher quality" ignores a lot of the picture. The supposedly "premium" Macs Apple was producing in the mid 1990s were pretty bad, with a pretty substandard OS compared to Windows.

    Even now, with an exponentially better OS than the classic Mac OS, it's not all wonderful in the land of Mac hardware. Apple shamelessly uses cheaper, lower-quality notebook disc drives, graphics hardware, and optical drives on its desktop products. Apple's offerings on video hardware for its Mac Pros are limited and lackluster compared to options on high-end PCs, and Apple has been terrible at supporting recent iterations OpenGL on its releases of OS X. Apple as of late also has been slow on implementing standards into its Macs (Bluray and USB 3.0 spring to mind, though I'm willing to let USB 3.0 slide as Intel's failure).





    Quote:
    Originally Posted by AppleInsider View Post


    At the same time, Apple also benefits from the iPod's economies of scale, particularly in regards to RAM and application processors, making it harder for competitors to copy the iPhone at a significantly lower cost. Hardware makers selling devices running Microsoft's Windows Phone 7 or Google's free Android OS aren't selling devices that are noticeably cheaper than the iPhone.



    For many of its mission-critical parts on iDevices, Apple buys from Samsung, which sells premium Android smartphones on all four major US carriers. So Apple's economies of scale are hardly unique, seeing as its own A4 processors are made by the same company that makes the competing Galaxy S phone.



    Though I don't know where LG, HTC, Motorola, etc., source their parts



    Quote:
    Originally Posted by AppleInsider View Post


    Verizon tried to duplicate AT&T's smartphone success first via RIM's BlackBerry, then with Android phones last year, before deciding to join Apple in selling the iPhone, a move which is expected to be announced tomorrow.



    A bunch of Verizon Android LTE handsets were just unveiled this past week at CES. Saying that Verizon "tried" (past tense) to duplicate AT&T's success with Android is silly. Assuming a Verizon iPhone is launched tomorrow, Verizon is quite wise to promote both platforms in case one falters or fails



    Quote:
    Originally Posted by ghostface147 View Post


    I am wondering how legal it is to pay someone to lockout competitors. I understand exclusivity on a phone, but to say we'll pay you to not have it on T-Mobile or Sprint? That doesn't seem right.



    There isn't any effective difference between 1 carrier exclusivity and 2 carrier exclusivity. Unless Apple / Verizon / AT&T get hauled before the SEC and lose their case, there's nothing that compels Apple to sell the iPhone on any particular carrier. If Apple agrees to not let Sprint or T-Mobile have the iPhone, that's their business decision



    Quote:
    Originally Posted by Patranus View Post


    Ug. So the iPhone user gets screwed again with a $30 tethering deal.

    Why can't Steve just allow us to use them as WiFi hotspots like Android.



    Verizon doesn't. Though WiFi hotspots were a headline feature for Android 2.2, carriers can disable it, and Verizon did exactly that in the 2.2 update to the original moto Droid (the newer moto handsets have the tethering feature enabled). More reason for android owners to get rid of the badly-skinned, carrier-bloatware-laden default Android builds and replace them with community-developed builds from the public Android source code.





    This brings up another gripe of mine?how is it not ridiculous that carriers charge for tethering? If I buy 2GB of data for the month, why should AT&T care if I download 1.9 GB of data to my phone v. 1 GB of date to my phone & .9 GB of data to my laptop?
  • Reply 9 of 23
    bageljoeybageljoey Posts: 1,747member
    Quote:
    Originally Posted by ghostface147 View Post


    I am wondering how legal it is to pay someone to lockout competitors. I understand exclusivity on a phone, but to say we'll pay you to not have it on T-Mobile or Sprint? That doesn't seem right.



    I am wondering what is the difference between exclusivity (which you understand) and paying to exclude competitors (which you don't)...



    It is not like that exclusivity that AT&T has enjoyed for a few years was some sort of friendly gesture from Apple!
  • Reply 10 of 23
    docno42docno42 Posts: 3,270member
    Quote:
    Originally Posted by Patranus View Post


    Why can't Steve just allow us to use them as WiFi hotspots like Android.



    Because Steve doesn't have a choice - it's the carriers dictate.



    Heck, on Android you can't tether most phones without paying or jail breaking - just like on the iPhone - a quick google will show this.
  • Reply 11 of 23
    Quote:
    Originally Posted by digitalclips View Post


    Don't mention the antenna!!!!



    I'll never make that mistake again...
  • Reply 12 of 23
    Quote:
    Originally Posted by AppleInsider View Post


    Apple is now offering the iPhone 3GS for just $49 with a contact from AT&T.



    Does any one here have a contact at AT&T? I don't know anyone that works for them so I guess I can't participate in this deal.
  • Reply 13 of 23
    Quote:
    Originally Posted by pwj View Post


    There has, and always will be, high-end PC hardware priced similarly to Apple's hardware. Let's not paint all PCs with the stigma of being cheap and simple when plenty of them are not. (though there are plenty of crappily done PCs out there, for sure)



    And calling Macs "higher quality" ignores a lot of the picture. The supposedly "premium" Macs Apple was producing in the mid 1990s were pretty bad, with a pretty substandard OS compared to Windows.

    Even now, with an exponentially better OS than the classic Mac OS, it's not all wonderful in the land of Mac hardware. Apple shamelessly uses cheaper, lower-quality notebook disc drives, graphics hardware, and optical drives on its desktop products. Apple's offerings on video hardware for its Mac Pros are limited and lackluster compared to options on high-end PCs, and Apple has been terrible at supporting recent iterations OpenGL on its releases of OS X. Apple as of late also has been slow on implementing standards into its Macs (Bluray and USB 3.0 spring to mind, though I'm willing to let USB 3.0 slide as Intel's failure).







    For many of its mission-critical parts on iDevices, Apple buys from Samsung, which sells premium Android smartphones on all four major US carriers. So Apple's economies of scale are hardly unique, seeing as its own A4 processors are made by the same company that makes the competing Galaxy S phone.



    Though I don't know where LG, HTC, Motorola, etc., source their parts







    A bunch of Verizon Android LTE handsets were just unveiled this past week at CES. Saying that Verizon "tried" (past tense) to duplicate AT&T's success with Android is silly. Assuming a Verizon iPhone is launched tomorrow, Verizon is quite wise to promote both platforms in case one falters or fails







    There isn't any effective difference between 1 carrier exclusivity and 2 carrier exclusivity. Unless Apple / Verizon / AT&T get hauled before the SEC and lose their case, there's nothing that compels Apple to sell the iPhone on any particular carrier. If Apple agrees to not let Sprint or T-Mobile have the iPhone, that's their business decision







    Verizon doesn't. Though WiFi hotspots were a headline feature for Android 2.2, carriers can disable it, and Verizon did exactly that in the 2.2 update to the original moto Droid (the newer moto handsets have the tethering feature enabled). More reason for android owners to get rid of the badly-skinned, carrier-bloatware-laden default Android builds and replace them with community-developed builds from the public Android source code.





    This brings up another gripe of mine?how is it not ridiculous that carriers charge for tethering? If I buy 2GB of data for the month, why should AT&T care if I download 1.9 GB of data to my phone v. 1 GB of date to my phone & .9 GB of data to my laptop?





    Well i really like your views & i too agree with the same ...........
  • Reply 14 of 23
    Quote:
    Originally Posted by pwj View Post


    For many of its mission-critical parts on iDevices, Apple buys from Samsung, which sells premium Android smartphones on all four major US carriers. So Apple's economies of scale are hardly unique, seeing as its own A4 processors are made by the same company that makes the competing Galaxy S phone.



    Though I don't know where LG, HTC, Motorola, etc., source their parts



    Samsung supplies Apple with a portion of its flash chips and I believe they are second only to Intel in terms of chip production so they certainly enjoy economies of scale as far as chip production goes. I'm not sure how they stand on other components, but they currently have twice the revenue Apple has, so they are a formidable competitor.



    I believe LG spun off its mobile phone division as a separate company and are now only loosely affiliated with the rest of LG. They sell a large number of phones, however that is spread over a large variety of models and the majority of their sales, so they don't have the economies of sales Apple has.



    I'm not sure where Motorola currently stands in terms of chip production. Motorola chips were used in the original Mac's, but I don't think they are a major player any more. And of course they don't sell nearly as many units as Apple.



    I'm not sure if HTC does anything other than mobile devices, but that is what the are known for and their sales pale in comparison to Apple's.



    I'm too tired to second check any of the facts I stated, so if I'm wrong on anything, call me on it.
  • Reply 15 of 23
    istudistud Posts: 193member
    Quote:
    Originally Posted by Patranus View Post


    Ug. So the iPhone user gets screwed again with a $30 tethering deal.

    Why can't Steve just allow us to use them as WiFi hotspots like Android.



    It's the carriers. In the UK, I can tether with my iPhone no problem, as part of the contract. No extra fees. I'm with 3, UK.
  • Reply 16 of 23
    I live in Australia and all carriers have the iPhone and in my experience Android phones are still a rarity (which seem to backed-up by the sales data).



    In Australia, Telstra has the best network by far and just before the release of the iPhone 4 Telstra dropped prices on its plans.



    I now enjoy the best phone on the best network :-)



    So if Verizon network is as good as everyone says Android will no longer have a reason to exist and will be relegated to your second tier networks and for geek customers only.



    Android phones will end up in the land of misfit toys :-(
  • Reply 17 of 23
    MacProMacPro Posts: 17,868member
    Quote:
    Originally Posted by scottkrk View Post


    I live in Australia and all carriers have the iPhone and in my experience Android phones are still a rarity (which seem to backed-up by the sales data).



    In Australia, Telstra has the best network by far. Just before the release of the iPhone 4 Telstra dropped prices on its plans. I now enjoy the best phone on the best network which has made such a difference.



    So if Verizon network is as good as everyone says Android will no longer have a reason to exist and will relegated to your second tier networks for geek customers only.



    Android phones will end up in the land of lost toys :-(



    Hello Australia



    And be joined by Windows PCs over the next few years.



    I think iPad will soon convert most casual PC users once they realize it does everything and more they always wanted their PC to do but never did (well).
  • Reply 18 of 23
    Quote:
    Originally Posted by pwj View Post


    This brings up another gripe of mine?how is it not ridiculous that carriers charge for tethering? If I buy 2GB of data for the month, why should AT&T care if I download 1.9 GB of data to my phone v. 1 GB of date to my phone & .9 GB of data to my laptop?



    Well, in fact it is ridiculous. Here in Austria my carrier (T-Mobile) charges no additional fee for tethering my iPhone. But competitors in here do.



    However, ridiculous as it is from our point of view, I can see the point of the carriers. If you really download 1.9 GB to your phone every month there is nothing to discuss about. But be honest. Do you really download 1.9 GB a month with your phone? I would say, you don't. And that's the point.



    The carriers give you a limit of let's say 1 or 2 GB a month and they know, that you most probably won't use it to the extend. If you stick to your phone that is.



    If you tether however... well that's another story.



    And that's what they are calculating, when offering you a specific plan. They give you a limit, knowing that you will only use a quarter or half the traffic you theoretically can do. If you stick to the phone.



    But from our point of view it is ridiculous, that's where you are right.
  • Reply 19 of 23
    MacProMacPro Posts: 17,868member
    Quote:
    Originally Posted by spockie View Post


    Well, in fact it is ridiculous. Here in Austria my carrier (T-Mobile) charges no additional fee for tethering my iPhone. But competitors in here do.



    However, ridiculous as it is from our point of view, I can see the point of the carriers. If you really download 1.9 GB to your phone every month there is nothing to discuss about. But be honest. Do you really download 1.9 GB a month with your phone? I would say, you don't. And that's the point.



    The carriers give you a limit of let's say 1 or 2 GB a month and they know, that you most probably won't use it to the extend. If you stick to your phone that is.



    If you tether however... well that's another story.



    And that's what they are calculating, when offering you a specific plan. They give you a limit, knowing that you will only use a quarter or half the traffic you theoretically can do. If you stick to the phone.



    But from our point of view it is ridiculous, that's where you are right.



    I can see what you are saying and it kind of make sense except if I could tether here in the USA I am sure it would not be used very often. Only when totally unable to get access to wi-fi and in any one month that (for me at least) would not be very often. So a free service with a modest limit would be welcome as an emergency system I guess I'd call it.



    Apple should offer an option (kind of like Plane Mode) called Tethered Mode that makes all videos and large files a click to load option similar to mail seen in the Junk folder.
  • Reply 20 of 23
    realisticrealistic Posts: 1,121member
    Quote:
    Originally Posted by digitalclips View Post


    I can see what you are saying and it kind of make sense except if I could tether here in the USA I am sure it would not be used very often. Only when totally unable to get access to wi-fi and in any one month that (for me at least) would not be very often. So a free service with a modest limit would be welcome as an emergency system I guess I'd call it.



    Apple should offer an option (kind of like Plane Mode) called Tethered Mode that makes all videos and large files a click to load option similar to mail seen in the Junk folder.



    Apple doesn't set or design the rate plans, the carriers do, so bug or complain to the carriers, not Apple.
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