PhotoThere's possible bad news on the horizon for the Apple company and its stockholders — not to mention ordinary consumers who want to buy the latest iProducts but think current iPrices are already too high: the up-front cost of an iPhone and other devices, whether from Apple or otherwise, is due to rise, now that various carriers have decided to stop subsidizing them.

AndroidHeadlines reported two weeks ago that Chinese wireless-service carriers will be ending their device subsidies, and that “high-end device sales” were sure to suffer as a result.

On Sept. 7, The Wall Street Journal reported a similar story about carriers in the U.S. (especially Apple, which is unveiling a new and more expensive iPhone this week): “In recent years, Americans have been spared the sticker shock of paying full price for a new iPhone because wireless operators offered upfront discounts approaching $500 a phone.”

In China, which due to its enormous population has more wireless subscribers than any market in the world, the subsidy is even higher: a latest-gen iPhone or Samsung Galaxy that would ordinarily cost $800 “only” costs $100 or $200 to the end user. (Bear in mind: the average Chinese household income is only about one-eighth the average American household income. Even when purchasing power parity is taken into account, a $500 or $600 subsidy is worth far more to the average Chinese citizen than the average American.)

Balancing act

Phone companies and carriers already engage in a tricky balancing act with their consumers: of course, the company wants to get as much money from you as possible. Meanwhile, you probably want to pay the company as little money as possible — even if you're extravagant enough to change phones every two months or so, whenever the latest improved or upgraded version comes onto the market.

Even with subsidies, you can still find yourself spending a lot of money on new phone technology, especially if you're a fan of Apple products which tend to sell for a premium compared to the other brands.

So, at first glance, it looks like the end of carrier subsidies will turn out badly for somebody: bad for the consumers who will pay more for the same product, or perhaps bad for the companies, if enough consumers decide “Rather than pay more for new-gen technology, let's hang on to this slightly older-gen technology awhile longer.”

On the other hand, perhaps the idea “This will end badly” is unreasonably pessimistic — or perhaps the idea “Subsidies are good, thus the end of a subsidy is bad” is false.

The Motley Fool investment blog certainly thinks so. It suggested that the end of subsidies could ultimately benefit Apple, and iPhone consumers:

Going back to the first rule of economics -- there's no such thing as a free lunch -- the carrier isn't paying the subsidy, you are. The carriers are simply paying up front to lock you into a contract; they price the monthly plans accordingly to reap the costs of the initial hardware subsidy.

Contract terms

True enough. If you have a subsidized smartphone — either an $800 new-gen model for which you paid a fraction of that, or an older-gen model you got “for free” — it's almost certain that in exchange for that free or reduced-price phone, you had to sign a contract agreeing to pay for phone service from a particular provider for a certain length of time. And if you could see your wireless carrier's precise financial breakdown (its profits versus its expenditures), you'd certainly see that the company did not lose any money off your free or discounted phone.

Even with the consumer directly bearing the full, unsubsidized cost of a new phone, the cost rarely appears upfront; most companies offer payment plans, so that instead of (for example) paying $600 at once, you might be charged an extra $25 per month, every month, for the two-year life of the contract. (That's assuming an interest-free loan, of course; otherwise you might instead have a situation where you pay off that $600 phone in $30 monthly installments, ultimately paying $720 in all.)

Then again: most people — even those who self-identify as frugal — have one or two hobbies or favorite luxuries on which they're willing to splurge: some people might scrimp and save in most things so they can afford to take exotic vacations. And there are plenty of technophiles who like new technology for its own sake, and want to upgrade to the newest and latest technology solely because it's the newest and latest.

Are there enough technophiles – and do they have enough money – to keep buying high-end new-gen products at a rate that won't sink companies' profit margins? It's possible, especially if the new, no-subsidy system also means an end to two-year contracts written to ensure the companies or carriers recoup the cost of the subsidy.

Downsides of two-year contracts

The Motley Fool discussed these downsides of traditional two-year contracts: “A two-year contract essentially guarantees a two-year refresh cycle for its customers. The early termination fee -- which is as high as $350 at some carriers -- essentially locks the buyer into the phone as well as the contract.”

That's not much of a problem for the type of person who views a smartphone (or computer, or any other techno-gadget) as merely a tool or toy, the type who avoids buying Version 1.0 products in lieu of waiting for later, cheaper versions with the “bugs” worked out of the system. But those two-year contracts are very hobbling to technophiles who'd love to upgrade to the newest devices as soon as they come on the market — except they're still locked into a pre-existing phone contract for a number of months. If the end of subsidies also comes with the end of fixed-term contracts, this just might prove a win-win situation for everybody: lower prices for consumers and higher profits for companies.


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