Do Apple’s Carrier Subsidies Matter?

by Christopher Paul on April 16, 2012

Apple’s stock dipped over 4% today (just above $25) on continued talk of reduced carrier subsidies. But do they matter? I don’t think so. What matters to Apple is the price margin and the price to the consumer. If Apple can keep them the same without the carriers forking over the same money they do with the iPhone 4S, who cares? It would be wrong to judge Apple’s profitability based on how much the carriers contribute.

I’m going by memory on this but I thought an unsubsidized iPhone goes for about $650. Consumers pay $200 for it with their two year agreement leaving $450 for the carriers to cover. But let’s say the newest iPhone costs $600 and the consumer pays $200 for it. That means the carriers pay less in subsidies but only because the phone itself is cheaper. So long as Apple’s cost for the device goes down by the same relative amount compared to their margins, they don’t lose much.

In this example, let’s assume the consumer pays what it costs Apple to build the iPhone – $200. But for the next phone, let’s say the consumer pays $200 but it costs Apple $150 to build the phone. The carriers pay $50 less to subsidize but Apple still gets $450 per device. It’s an overly simplistic analogy but if Apple’s margin is 30% in both cases, then it shouldn’t matter.

Of course, if Apple’s costs stay the same and the carriers reduce their subsidies, then, yes, it’s cause for concern but only to their margins not the profitability. Sales records are being broken left and right so the absolute dollar can still go up with the volume.

I’m no analyst I could have overlooked something but hearing that the carriers might pay less per device means nothing to me unless I know what Apple’s charging them for it or what Apple’s costs are. For all I know, Apple could have slashed their costs by 20% and passed 10% of those savings to the carriers resulting in lower subsidies.

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