iPhone subsidies are here to stay

The best companies in today’s world have a disproportionate influence over their entire ecosystem. Think Coke, Pepsi, Walmart, Ford, Microsoft etc-  In other words they are at the center of the ecosystem- having significant influence over their suppliers, channel partners, complementary partners and customers. Even add rivals to the list- i.e. Rivals are forced to adapt their existing product and services strategies in response to moves made by either the company or any of the ecosystem players

 

 

– Protection of the ecosystem from external threats and Indirect control on parts of the ecosystem is a level above mere influence. Companies that can orchestrate specific tactical actions across their ecosystem win big. Telecommunications companies have been least subject to these kinds of influences by any single product company- most of it have to do with regulatory concerns than anything else.

 

 

All that changed with the arrival of the iPhone and how Apple dealt with the carriers. I have written about this in the past and how the Apple effectively managed distribution of power by exclusivity- originally going with one carrier (AT&T)

 

 

Today, there is Verizon and Sprint in the US and of course there are similar arrangements in other countries. In most cases, Apple was the one who decided when to sign on a new carrier inspite of the fact that the carriers were badly in need of Apple’s products. Apple products continue to be a big chunk of the revenues of these carriers wireless divisions – for eg in case of AT&T it is north of 40%.

 

 

In short, Apple still controls the distribution strategy and the network over which these devices work on. The subsidies are a necessary component of these deals- i.e. Carriers subsidize the iPhone’s costs and recover these through a customer contract over 2 years. Overall the carriers are quite happy with this arrangement as iPhone and iPad users are known to be amongst the largest consumers of data and phone plans. Hence to think that all of a sudden they will stop or reduce those subsidies is quite unreal due to the following

 

 

-it will result in lost business and has a direct impact on their growth( why would any carrier invite that in a highly competitive market)

– Lower subsidies by any single carrier, means customers may go with another carrier straight away- of course customers can switch to another phone, but given the  near cult like popularity of the iPhone & iPad that will likely be a low single digit percentage of conversions.

– Unless there is a backdoor agreement between 2 carriers in any market( isn’t that anti- trust?) it is unlikely that any single carrier will throw out subsidies unilaterally- this is an open invitation to the competition to steal market share.

– it may mean a breach of contract and Apple may have written suitable penalties if this happens

– the carrier may miss out on future business from Apple- i.e. new devices may end up going exclusive with the competitor

 

 

 

To summarize, unless Apple desires a change, it is unlikely that the carriers by themselves will be able to do anything to come out of subsidies. Besides this is part of Apple’s overall strategy of tightly controlling the ecosystem of suppliers and the end customer experience. Carriers are better off trying to upsell the customer on other services/ plans etc than trying to look bad in the books of Apple.

 

 

This level of indirect control over a key part of their ecosystem ( the wireless networks) is what makes Apple such a dominant player. Recent comments by some analysts over the potential loss of subsidies are highly misplaced and exaggerated. The disruption in carrier dominance has already happened- the train has left the station. Longer term this arrangement is good for everyone- especially the consumer as they do not have to get tied into carrier provided apps and services.

 

 

As regards all the other devices, with Android, Windows7 etc, carriers have to look at each one on their merits. The customer will ultimately decide whether any of those phones will be able to give the iPhone a run for it’s money.