Whenever a big technology company’s CEO hits the public airwaves with a pronouncement you can be sure of one thing. Something misleading will hit you in the face. AT&T’s CEOs seem to do that on a regular basis.
History Repeats Itself
A few years ago, then AT&T CEO Ed Whitacre, who went on to run General Motors, declared that Google was getting a ‘free ride‘ on his company’s pipes.
You see, Google uses a lot of bandwidth, what with a gazillion searches performed by the second, and all those YouTube videos, and AT&T’s CEO saw someone with the money to pay more to use his pipes.
The reason nothing happened with the threat is because pretty much everyone using the internet’s ‘pipes’ is already paying for the usage, including Google.
Google pays someone for access to the internet. AT&T greedily wanted Google to pay more, because, you know, pipes are expensive, and Google has a lot of money.
Google didn’t blink because it didn’t have to. Whitacre went on to GM and finally retired as a well-to-do triple dipper and nothing happened to AT&T’s pipes.
You’re reading my article because you’ve paid someone to let you access the internet (all those interconnected pipes Whitacre was referring to). Everyone pays.
Subsidy? Or, Payment Plan?
Well, AT&T’s latest CEO is doing the same thing. Randall Stephenson told investors that wireless carriers need to have an ecosystem which doesn’t have subsidies for high-end smartphones.
That’s right. He used the word ‘subsidies.’ I translate that as, ‘We’d like someone else to handle financing of smartphones.’ OS X defines subsidy thusly:
subsidy |ˈsəbsidē| noun ( pl. subsidies )
1 a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive: a farm subsidy | they disdain government subsidy.
• a sum of money granted to support an arts organization or other undertaking held to be in the public interest.
• a grant or contribution of money.
2 historical a parliamentary grant to the sovereign for state needs.
• a tax levied on a particular occasion.
The implication here is that AT&T is contributing to the money required for you to buy an iPhone. Head over to the Apple Store and check out the iPhone 5s. A 16GB version starts at $199 for all major carriers in the U.S.
In other words, you pay $199 (plus tax, blah, blah) and you can walk away with a new iPhone, which sells at full retail for $649. You save almost $450, right? Is that a subsidy? It looks like it until you select a plan.
AT&T will charge you $60 a month for 24 months for unlimited voice and messaging on your iPhone, but you get only 300MB of bandwidth (trust me, that’s not much). As a comparison, Walmart’s StraightTalk lets you buy an iPhone 5s at a discount, and attach it to AT&T’s network with unlimited voice and messaging and 2.5GB of bandwidth for a mere $45 a month.
That same 2GB of bandwidth on the AT&T plan would cost you $95 a month for 24 months, a $1,200 premium at $50 a month more than Walmart’s StraightTalk plan (which uses AT&T’s network) for the same iPhone.
Subsidy? What subsidy? Subtract the iPhone 5s’s retail price of $649 from $1,200 and AT&T is making a killing by ‘subsidizing‘ the iPhone.
A Rose By Any Other Name
It’s not a subsidy as much as it is a payment plan whereby smartphone users on any AT&T plan are paying through the nose for the privilege of getting a new iPhone 5s for a mere $199 down. Verizon and Sprint are guilty of the same misleading and their prices are similar to AT&T. Go with a plan and they make money.
T-Mobile, the #4 carrier, which dubs itself as the un-carrier, for it’s non-carrier-like pricing plan is desperate, so it has a different plan. Buy an iPhone 5s for $649 for T-Mobile, and it comes contract-free. But you still need a plan. How about the unlimited talk, unlimited text, and 2.5GB of bandwidth for $60 a month (plus taxes, fees, blah, blah…)?
There’s no so-called subsidy to hide the purchase price because you’re buying the iPhone right up front. That’s where AT&T’s $199 price looks good. With T-Mobile you need to fork over the full $649 for a 16GB iPhone 5s.
Or, do you?
T-Mobile may not be the top carrier but they’re not stupid so they have an iPhone 5s purchase plan with a zero down payment. Merely add $27 a month to your bill for 24 months and you’re good to go. Even if you don’t stick with T-Mobile, you’re still on the hook for the monthly payment. Hmmm. Let’s see about that. $27 a month times 24 months is $648 so T-Mobile is discounting the iPhone $1.00.
Does T-Mobile pay $649 to Apple for an iPhone? No. They get a discount as a retailer. How much? Only Apple and T-Mobile know, but they’re not losing money by selling iPhones. In fact, T-Mobile’s customer turnover has been stopped– thanks to direct pricing and the addition of the iPhone.
At least T-Mobile is calling it what it is. Instead of subsidy, which implies they give you money to buy an iPhone, it’s a payment plan— the same as AT&T.
As both the U.S. and Japanese smartphone markets attest, when the barrier to entry (initial price) is lowered, iPhone sales take off. AT&T will not do anything to jeopardize that. T-Mobile’s model simply got rid of the term subsidy in favor of what it really is– a payment plan.
Maybe AT&T’s CEO is smarter than we give him credit. Maybe what he wants is for Apple to get into the finance business so AT&T can get out of it.
Apple is sitting on about $150-billion in cash. What would happen to iPhone sales if Apple decided to use some of that money by building their own financial arm (much as some auto companies have their own leasing financial arrangements) and make iPhones and iPads available with no money down and simple monthly payments?
Copy that, Samsung.