August 18, 2022

Finally, some good news for the iPhone

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apple-iphone7By Max Greve From Seeking Alpha

Apple iPhone sales have taken a hit from, among other things, the end of the USA phone subsidy system, which reduced prices by $450 at the point of sale.

However, the key number was the delta subsidy, the higher subsidy iPhone got relative to other smartphones, which was $150.

Now, iPhone subsidies are returning to the market.

Most other phones no longer receive any subsidy, so iPhone’s delta subsidy may be higher than ever.


For months now, Apple (NASDAQ:AAPL) has seemed to suffer from an unending stream of bad news as iPhones joined iPads in decline and the Apple Watch didn’t really seem to be taking off. But now, I believe there may be some unambiguously good news, as the iPhone has a new tailwind heading into the new year.

A Little iPhone History

When the iPhone first went on sale, just about the only thing people didn’t like about it was the price. At the time, it was priced at $599 for an 8GB model, and despite the lack of a subsidy for the device, users still had to sign a two-year contract with AT&T (NYSE:T). The 8GB model briefly went down to $399 for the holiday season, which until the iPhone SE launch was the cheapest a new-design iPhone had ever been. When the iPhone 3G launched in 2008, the $199 subsidized system was initiated.

Subsidies for the iPhone were a steady $450 for many years. Since Apple got the same subsidy for all iPhones, regardless of model or age, it obviously never priced a phone lower than $450. Even as T-Mobile’s (NASDAQ:TMUS) Un-Carrier revolution made clear that there was demand for a new way of buying phones, and 70% of smartphone sales on original partner AT&T became unsubsidized by mid-2015, Apple stuck to its guns on pricing.

But because all smartphones were being subsidized at first, the relevant number for Apple was not so much the total subsidy as what CEO Tim Cook called the delta subsidy. That is, the portion of the subsidy that was greater than the subsidy Android (NASDAQ:GOOG) (NASDAQ:GOOGL) and feature phones received. It was a little hard to measure that exactly. While Apple’s subsidy was a consistent $450, Android, feature, BlackBerry (NASDAQ:BBRY) and later Microsoft Windows (NASDAQ:MSFT) phone subsidies varied by manufacturer and model. But the general average summed to about $300. In other words, Android was subsidizing Apple to the tune of $150 per phone.

The iPhone Premium

That was the subsidy Apple really cared about. It had a real impact on market penetration, and Apple guarded it zealously for years. Sprint (NYSE:S) and Verizon (NYSE:VZ) both had to agree to it before Apple would expand the iPhone franchise to them. Even some international carriers that never really had a subsidy system like the US, got stuck with a version of it. Nor did entering the prepaid market, where there was really no such things as subsidies, stop Apple.

The first US prepaid carrier to get the iPhone was Cricket, then still an independent company. Obviously, a prepaid carrier couldn’t subsidize the iPhone $450 with no contract to guarantee it would recoup the investment. And Apple didn’t expect them to. But nor would it let the phone go subsidy-free. When the deal was finally announced, Cricket said it would be charging $399 for the older iPhone 4 (then selling for $549) and $499 for the iPhone 4S ($649 MSRP). Other phones would continue not to be subsidized, but the Apple subsidy, the delta subsidy, was… $150.

It was T-Mobile that finally managed to kill this system, with a little help from Uncle Sam. Since T-Mobile ran on the same GSM network architecture as AT&T, and unlocked GSM phones could be ported over far easier than CDMA ones, T-Mobile began a network transformation to make its towers and spectrum iPhone-compatible. It then inaugurated new phone plans that allowed customers to bring their own devices to the network, in exchange for lower prices on phone plans. This essentially gave AT&T and T-Mobile a single pool of phone customers, undermining the market case for subsidies. When Verizon announced that it would be selling its CDMA iPhones with the GSM slot unlocked out of the box, to comply with a network architecture provision of the recent spectrum auction, the doors were finally open.

The Empire Strikes Back

For a while, smartphone subsidies seemed destined to the scrapheap of history. But about 18 months ago, the very company that killed the smartphone subsidy, T-Mobile, started to experiment with bringing it back. And just like before, it’s worked so well that other competitors are starting to copy it, Sprint quickly and the Big Two a little more slowly.

It began last year, when the two smaller upstart carriers, T-Mobile and Sprint, ran promotions on the iPhone, which saw the phone receive substantial discounting even in this new era of contract-free plans that are supposed to reflect the full price of the phone. T-Mobile started it by offering to cut the price of a then-new iPhone 6s to $5/month, totaling $254 to own a new iPhone 6s, with the trade-in of an iPhone 6, valued at $270. That left a residual savings of $125, money that T-Mobile was essentially eating on every iPhone sale. T-Mobile also offered to simply cut $125 from the price of a new iPhone with no trade-in at all. Sprint soon answered with an offer of its own.

$125 was far less than the old $450, of course. But again, that doesn’t really matter. It is most of the old $150 delta that Apple guarded so zealously. And it came about completely on its own in a contract-free phone system.

Not An Isolated Incident

Since it was only a small net subsidy being offered only on the smaller carriers, it was relatively easy last year to dismiss it, or at least consider it a relative triviality. But with the launch of the iPhone 7, those deals are back again. And this time, they’re far bigger. T-Mobile offered $650 in credit for an iPhone 6 or 6S, and even any member of the iPhone 5 family netted a $400 credit. Apple’s own credits for trade-ins topped out at $250 for an iPhone 6 Plus, and less for older models.

The iPhone 5c is only worth $40 to Apple. So T-Mobile was essentially subsidizing a new iPhone by anywhere from $360-$450. That is at least 80% of the old subsidy level, perhaps as much as a full restoration of it. And it is as much as three times the old delta subsidy, since other smartphones still aren’t subsidized much if at all.

Sprint matched the offer again. And unlike last year, the Big Two felt that they had to get in on the act this year as well, since it seemed so effective at pilfering their customer base. Their subsidies were generally no less generous than their smaller rivals. Verizon even offered up to $300 for something as old as an iPhone 4, whose market value is barely above zero.

Investment Implications

Apple has been the subject of a lot of investor concern lately, and justifiably so. There are some genuine concerns about its declining sales volume. But this is an unambiguously positive development for Apple that might help to redress the balance at least a little. Although China and India are increasingly important for Apple and all smartphone manufacturers, the US remains the largest developed world smartphone market, and the return of subsidies may help to substantially boost Apple’s prospects in this market.

As for the cellular carriers themselves, I don’t think this should be regarded too negatively. No doubt about it, these are expensive subsidies. The carriers complained about iPhone subsidy costs for years, so they can’t be too happy they’re back. But it’s unlikely that the carriers are spending money they otherwise wouldn’t be spending.

Instead of seeing this as a cost increase for the carriers, I believe investors should regard it as an experiment with a different method of spending money that had already been set aside for promotional purposes. Instead of some more free data or a couple of months of free service or a free extra line on a family plan, they’re doing this.

My guess is this money will only be spent so long as the internal numbers show the rate of return justifies it. Unlike years past when not carrying the iPhone was the kiss of death, and the iPhone required such subsidies, Apple has not really forced the carriers into this. The market has, because T-Mobile learned that it worked and so the others had to follow suit.

The real loser here is Android, both Google and its hardware partners, including Samsung (OTC:SSNLF) and others. They always thought that their lower remuneration was the result of unfair market practices, that if the iPhone could just be uncoupled from the two-year contract, the delta in payments would normalize. For a little while it looked like they were right, but now the market is moving back to explicitly favoring iPhones. And this time, there’s no way to claim Apple is cheating. It won its iPhone subsidies fair and square.


Apple drew a lot of flak for years about the high subsidies it demanded in exchange for the right to carry the iPhone. It insisted that they were justified by the benefits they gave to carrier partners. It was widely panned for that claim, but the market may have just pronounced its verdict that they were right all along.

This is an unambiguous win for Apple, a clear sign that the iPhone remains in strong demand among consumers despite the chorus of complaints about slow innovation and the rest of it. And it is a clear defeat for Android, which just can’t seem to command that kind of loyalty. For the carriers, it is more or less business as usual, just the latest volleys in the ongoing wireless price war.

Disclosure: I am/we are long S.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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