Apple's iPhone loss is Verizon and AT&T's gain, and carrier subsidies are to blame

This article may contain personal views and opinion from the author.
Apple's iPhone loss is Verizon and AT&T's gain, and carrier subsidies are to blame
Those were the days, but users upgrading from an iPhone 6 to 7, are in for a sticker shock, admits Tim Cook.

Apple will be fine. Despite the unprecedented 15% drop in iPhone sales, its $19.97 billion net income is just shy of the record-setting $20.07 billion a year ago. Apple's cash pile grew to $245 billion, and the installed user base of iOS devices grew to 1.4 billion, paving the way for future increases in the already record-breaking services revenue which has the highest gross margins out of all of Apple's business segments. 

On the surface, even the high iPhone prices seem to have simply added to the market share expansion of premium phones which went up 18% last year, according to Counterpoint.

Still, the top revenue number was less than analysts expected at the beginning of this past quarter and in line with Apple's unprecedented sales warning earlier this month. The net income, on the other hand, while the second-highest on record in Apple's history, saw a big boost from lowering the effective tax rate Apple pays. It went from 26% a year ago, to 16.5% now, thanks to the Republican Tax Cuts and Jobs Act of 2017, adding more than $2 billion to Apple's profits to compensate for the drop in iPhone sales.

The Chief Financial Officer and the CEO Tim Cook himself listed numerous reasons for the perfect storm that is facing the industry, and iPhone revenue in particular - the White House trade wars and the resulting slowdown, US dollar strength that made iPhones prohibitively expensive in major markets, and even the mobile games ban in China that saw services revenue drop precipitously there.

What caught our attention, though, is that Apple's CEO Tim Cook went way back to list the demise of US carrier subsidies as another reason for the tepid sales of Apple's bread-and-butter signature product. 

While that happened a few years back, he has a point, as, thanks to the low-cost battery swaps people are now clinging to their iPhones longer, and are in for a sticker shock when they see the new pricing.

Herein lies the crux of the matter. Throughout the most part of its existence as a product, the iPhone sales had a crutch in the form of carrier subsidies in its largest, most visible market of North America, but also in China and other places. It's no coincidence that the US is the country with the highest iOS adoption rate, where half of smartphone users are rocking iPhones. In markets where carriers aren't subsidizing iPhones, Android handsets have been decimating Apple's finest for a while now when it comes to market share.

We plotted the profit margins of the two largest US carriers - Verizon and AT&T - against Apple's sales to gauge if indeed some of the missed profit opportunities for the iPhone maker went straight into carriers' pockets.

The biggest Chinese carriers also started scaling on their iPhone subsidies way back in 2015, and the resulting switch to local value-for-money Android brands wasn't far behind. As usual in the local command economy, it was a mandated effort to favor domestic products, thinly veiled as a government request that Chinese carriers cut their marketing budgets by 20%. 

Beijing knew that would mean demolishing expensive phone subsidies given to the likes of Apple and Samsung's S- or Note lines. Before the move, $500+ handsets like the iPhone held 27% market share in China, and now Samsung's market share is almost non-existent there, while Apple's is greatly diminished, despite the iPhone being a status symbol in Asia.

When carrier subsidies go, the iPhone goes, it seems, and Apple has little recourse to offset that but actually lowering iPhone prices, which it seems to be perfectly aware of, and is currently doing in China and other places, under the guise of "currency fluctuation adjustments."



1. cmdacos

Posts: 4386; Member since: Nov 01, 2016

Don't think subsidies are that big of an impact. There are still many regions across the world where subsidies still exist. In Canada for example you could get any of the 2018 iPhones for $0 down at launch. Yes there is still the smoothing of payments reduced slightly by subsidies but most will ignore that for the no cost up front payment.

7. Atechguy0

Posts: 918; Member since: Aug 03, 2018

When most carriers have to purchase iPhones as well as other smartphones from OEMs outright. Then they don't want to buy that many up front. Especially if those devices are sitting in their inventory. So carriers with the help of OEMs will put deals together in order to move and entice customers to buy their devices. It's not only the new iPhones going for zero dollars, but many others are going for the same thing as well. Some will give you free TVs with a new smartphone. Not to mention all the buy one, get one (BOGO) free deals. Plus some give you free gift cards, and more. We have heard it for years. This isn't new. The real problem with iPhones is all the crap afterwards. Like the Apple insurance rip off stuff (Apple Care). Buying quick chargers and cables for iPhones when everyone else includes that stuff. Not to mention the others include a lot more in their boxes. Apple charges you for everything else. People have caught on to Apple's greedy antics.

20. whatev

Posts: 2444; Member since: Oct 28, 2015

And Canada as a smart, developed and advanced country loves apple, there the “fruit company” has almost 60% market share

2. wickedwilly

Posts: 773; Member since: Sep 19, 2018

For those who claim high iPhone prices are nothing to do with the decline in numbers of iPhones sold (you know who you are), read this report carefully. Same for those who denied carrier subsidies and leases did not help underpin iPhone sales, the same applies. Face the facts for once and stop apologizing for Apple and TC. Apple is not dead by a long way and price is not the only reason for this fall in demand, but Apple's greedy pricing in a difficult economic climate and lack of innovation while still increasing prices IS a factor whether you face it or not.

6. libra89

Posts: 2335; Member since: Apr 15, 2016

Well said. The sticker shock and high prices are real together.

17. Greenmule

Posts: 130; Member since: Apr 24, 2017

Apple just put themselves in the used smartphone business. that universe is not where Apple exists. Then, Apple tells me...Apple..that my 15 month old **256GB** iPhone 8 plus is worth $370.00 when I trade it on a new 256 GB Xs. They want my nearly new 8 plus and WHAT?!?!; how much did you say?!?! Now, Apple is telling you how little your iPhone 8 plus is worth. They said it, not the carrier, not some reseller. Hell, Samsung will sell me a new 9 plus for $100 off and still give me $300.00 for the 8 plus. And, nothing for the extra storage. Apple users are now beginning to realize that they either paid **way too much** for the 8 plus or the Xs is **way overpriced**!! And Apple, no one else made this monster. IMO, one great thing that Apple could do is make SIRI work. I just watched a friend use SIRI today...what a joke. He just went ahead and typed into Google.

8. dimas

Posts: 3446; Member since: Jul 22, 2014

Aye. And apple know how carriers offer their products. It's like making your friend sell your biscuits for $30 a box and hate him even if you know how he price it. For the past weeks, apple is giving their investors free baloneys.

3. looneyhouston

Posts: 43; Member since: Apr 10, 2014

over priced

4. looneyhouston

Posts: 43; Member since: Apr 10, 2014

I'm with T-mobile and in order for me to get an entry level iphone XS max i have to put a down payment of $349 with great credit. I have to put down $0 to get a one plus 6T... You can guess which I picked up.

5. dimas

Posts: 3446; Member since: Jul 22, 2014

Oh tim, you think people will buy iphone if it's not carrier subsidized? During the early years of smartphones, you need extended marketing to get people hyped, carrier representatives also did their part to promote your products. Carrier subsidies make your phones look like they are pocket-friendly and you know that's what will drive more sales. Please stop adding more low sale excuses. You used the carriers, they also used you. Both are businessmen and that's how business works.

9. tokuzumi

Posts: 1999; Member since: Aug 27, 2009

When will Phone Arena realize that Analysts are the meteorologists of the business world. They make guesses based on nothing, and are almost never right.

11. dimas

Posts: 3446; Member since: Jul 22, 2014

Maybe what you mean are astrologists. Meteorologists are scientists like astronomists.

10. darkkjedii

Posts: 31761; Member since: Feb 05, 2011

2019 better mean an amazing iPhone Apple, and not just stage talk. It needs to be way better, and do way more.

12. dimas

Posts: 3446; Member since: Jul 22, 2014

Aye. Apple is in a hang-over stage. They need to see more pocophone, oppo and huawei phones to wake them up.

21. darkkjedii

Posts: 31761; Member since: Feb 05, 2011

You're actually spot on correct. They need to look at these smaller companies, and realize how much more the iPhone could be.

13. CreeDiddy

Posts: 2284; Member since: Nov 04, 2011

Bottom line is that once Apple releases ridiculous features in the newest iPhone they will sell tons. Apple shouldn’t hold back on anything now. Go all out like the Mate 20 Pro and you will see a huge increase 2018 sales. Also keep the prices manageable and provide better trade in incentives. They will have a recipe for a bounce back year. If they want stagnation release another XS Max 2 for 2019...that’s the bottom line.

14. Back_from_beyond

Posts: 1485; Member since: Sep 04, 2015

Except Apple doesn't work that way and a big redesign isn't likely to boost sales either as the iPhone X, XS, XS Max and XR are already big redesigns for most users out there. The problem is the cost of these phones, people upgrading once every 3 years now instead of every 2 years and incremental updates that don't offer anything substantial. Some analysts have already said Apple won't see a sales boost until 2020, most likely because of 5G supporting iPhones are expected then.

16. osterrich21

Posts: 190; Member since: Apr 14, 2017

Again,Apple - "Qualcomm, HELP! ! I"

19. domfonusr

Posts: 1101; Member since: Jan 17, 2014

At the time when subsidies were readily available, I went out of my way to not take them in most cases, and bought used or unlocked devices on my own more than once per year. I ended up in a bad place because of that (Not to say that the same will happen to others... I was unwise in my own pursuits at the time). Now that subsidies are no longer available, that has driven me away from my prior post-paid providers into the prepaid marketplace, and regular-sized subsidies would be really nice right about now. I do think the prepaid carriers do sometimes subsidize devices to a small extent, but not like the post-paid carriers used to. If the carrier subsidies still existed, I would be on a post-paid network with a much nicer phone that I could have gotten just about for free for being willing to wait two years between phones.

34. tntwit

Posts: 86; Member since: Sep 11, 2012

The carrier subsidies were nothing more than a marketing shell game anyways. Despite numerous articles and the carriers swearing up and down that customers were NOT being charged extra in their phone bills for the phones under contract, our experience said otherwise. When we switched our plan to a "no contract" plan with Verizon, we still had phones under contract. Verizon handled it by charging us $20 per line until the contract dates ended. $20 x 24 months = $480 plus a down payment, often $199 or more, works out to $680 or more which is about what phones costs were a few years ago before they went nuts. Technically, we were not being charged for the phones, because, even worse, was that the carriers continued to charge that $20 a month after the contracts were up, which is why I always bought a new phone when the contract was up and encouraged everyone else to as well. You were paying for it already, and it was quite obvious. There was no way the carriers were just giving you a $650-$700 phone for $199; you were paying for it all along. The cost is still the same, the monthly payments are still there, but now much higher because the phones went up roughly 50% with no real justification in capability or user benefit. The difference now is that once the phone is paid for, your monthly bill goes down, so why buy another phone if there seems to be little benefit and the prices spiked? Android vendors raised prices as well, but they offer major discounts right out of the gate. It is a technique that makes the phones look premium, but makes the customer think they are getting a great deal. Car companies seem to do the same thing with $10,000 discounts on $50,000 vehicles. Apple won't play that game and now you are seeing the results. The iPhones are grossly over priced and now it is crystal clear to consumers with the current payment plans that the carries offer. The media and Apple seem slow to admit it.

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