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. But Apple Inc. faces
an uncertain new environment this week as it prepares to unveil new—and
what are expected to be more expensive—iPhones. Carriers have been weaning
consumers off subsidies and getting them to pay full price for new devices.
In most cases, consumers pay for the phones over time, the
way many people buy new cars. The carriers say they come out ahead by
eliminating the subsidies and allowing consumers to buy new phones without
upfront payments.
The approach poses risks for Apple. Its phones are most
popular in the countries where carriers subsidize the purchase price,
principally the U.S. and Japan. Eliminating subsidies will allow consumers to
see more clearly the price difference between Apple and rivals and could expose
the iPhone maker to more of the pricing pressure plaguing its competitors. Research
firm IDC estimated that the world-wide average selling price of an iPhone will
be $657 this year, compared with $254 for Android phones.
Apple is expected to unveil new iPhones on Tuesday with 4.7-
and 5.5-inch displays, up from 4 inches for its current models. Analysts
predict that Apple will charge as much as $100 more for the 5.5-inch model than
the $649 base price for its current top-model, the iPhone 5S. The plans aim to
shift subscribers off a subsidy system that allowed them to buy a new iPhone 5S
for $199, less than a third of the list price, with a two-year contract.
Under a subsidized plan, a customer typically pays $200 up
front for a base model of the iPhone 5S and roughly $80 a month for a common
service plan. The carriers make back the cost of the discount through the
monthly fees.
A typical new installment plan charges $27 a month for two
years to finance the same phone—about equal to the base price of the phone—plus
$65 a month for similar service. Consumers own the phone outright after the two
years and can continue using it by paying only for the service. Over two years,
consumers tend to pay more to the carriers under the new plans.
Consumers who have paid off their phones will have to decide
whether having the latest device is worth increasing their monthly bills. For a
family of four, a set of new iPhones would add more than $100 to the monthly
bill.
The move away from subsidies was sparked by T-Mobile, which
also started offering a program last year for customers to trade in their
phones after a specified period and begin financing a new device. All the other
major carriers now offer similar plans but also have the option of traditional
contract-based plans and pricing. As of the end of June, about 44% of
AT&T's U.S. postpaid smartphone users were on no-subsidy service plans.
Apple Chief Executive Tim Cook said the company
already was seeing a move away from subsidies. In the quarter through June,
fewer than 25% of iPhones were sold on a subsidy plan. By eliminating the $200 upfront fee to buy a
new high-end iPhone, more customers may be interested in an iPhone because the
financial sting is spread over monthly payments. Carriers also are offering
customers who remain under old contracts—who would normally have to wait to get
new phones—options to upgrade to new handsets if they switch to installment
plans.
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