Parable of the Apple Seed
February 8th, 2012, 3:38pm by KelvinI’ve been seeing a lot of stories like this one bemoaning the plight of the wireless carriers and all the money they are losing due to the iPhone. These stories are missing out on the basic economics of the subsidy-subscriber model.
Once upon a time, there was a young man who was heading into town to buy a cow. On the way, he was approached by a old woman, who sold him some magic apple seeds for $450. The man planted the seeds, and once a month, he picked the apples from the tree and sold them in town for $80. After 6 months, he was happy because he had made back all the money he’d spent on the seeds. In the 7th month, he was happy because he was getting money for free! He was so happy that he wished he had more seeds to plant!
Pretty obviously, if $1980 over 2 years is worth an upfront $450 cost to acquire a customer, then the more iPhone customers you get, the better. This is just an accounting quirk that carriers are reporting such huge losses in the launch quarter. Wonder why the subsidy isn’t amortized over the life of the contract? That would reflect the economics more accurately.
February 8th, 2012 at 3:56 pm
That’s why I rely on stock analysts for evaluation of business models rather than reporters.
February 8th, 2012 at 4:07 pm
Of course, if smartphone adoption were identical without the iPhone, the carriers would be better off with only a $250 subsidy vs. the $450 subsidy. I always figured that the high subsidy would vanish once exclusivity was ceded, but the iPhone became such a juggernaut that every carrier was forced to offer the bonus cash.
At the same time, it’s arguable that without the iPhone pushing Android, there would be fewer non-iPhone smarthphones on the market were the iPhone never released. Certainly Apple didn’t invent the smartphone. But it’s inarguable that the pace of innovation the past 5 years has been far greater than it was in the 5 years preceding it. While 3G networks and more power efficient chips played a role, it’s indisputable that the computer guys just walked in the room and released a game-changing product.
February 8th, 2012 at 4:39 pm
Definitely, there are 2 parts to the equation. $450 upfront is worth it for $1980 in future revenue. $250 is more worth it for $1980 in future revenue. Sprint nets $1500 for each iPhone customer they would not have gotten otherwise and loses $200 for each iPhone customer that otherwise would have been acquired with a different phone. Both Verizon and Sprint recently decided that it was worth it despite what appeared to be successful bets on Android. On the surface it does seem like carriers would be incentivized to steer customers to non-iPhones to the extent possible, but the recently revealed volume commitments cleverly align their interests with Apples. Paying $450 for a profitable customer is much better than paying $650 for a phone that sits in a warehouse.
February 8th, 2012 at 4:52 pm
This article puts it in the proper context.
http://allthingsd.com/20120208/apple-gets-the-credit-and-the-cash-for-growth-of-mobile-computing-revenue/
February 11th, 2012 at 7:06 am
That’s been the key to Apple’s incredible profitability is that they get paid $650 per phone when everyone else gets $450 per high end smartphone. No one expects those margins to last forever, but I wonder, what if Apple decided to sell an iPhone that cost them $400 to build instead of $300? The mind boggles– what killer features could they add? And how could any other manufacturer compete with that? Personally, I’d love to see inductive charging free out of the box.
February 11th, 2012 at 8:14 pm
I’d also love to see seamless address book integration from ALL the major social networks. One can dream…
February 12th, 2012 at 12:53 am
Hardware-wise, I can’t think of anything I’d want except the fastest processor they can make. The screen isn’t lacking and should not (IMHO) be bigger, I don’t care about NFC/wallet stuff (not sure I’d want that if it were available), and I don’t need more memory.
Like Jake’s example, there’s plenty of cool things that could be done software-wise, or infrastructure-wise. Maybe the extra $100 in hardware cost could filter down to paying the kids making the phones a little bit more…
February 12th, 2012 at 1:12 am
Seriously, Apple should build a plant in Detroit and sell iPhones made in the USA. What a feel good story that would be. Maybe they could make manufacturing a core competency, like they did with retail. Reap the efficiencies from having all the foremen carrying iPads or something š
As for Contacts synergy, I think adding Facebook has got to be a pretty high priority, at least so people’s profile pics show up. Android and WP7 do such a great job, it seems a fairly trivial thing to copy.
February 12th, 2012 at 2:02 am
But keep in mind the only people that will pay a premium to buy a “Made in the USA” phone are Americans. Did you guys listen to the This American Life episode? Worth a listen, for sure.