Daniel Eran Dilger in San Francisco
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Verizon soaking high end Android buyers to make up for iPhone subsidies

Daniel Eran Dilger

Apple has negotiated generous subsidies from mobile carriers to sell iPhones at lower upfront prices, but Google and its Android licensees haven’t, leaving carriers such as Verizon to drive up the price of higher end Android phones to make up the difference.
The result is a price disparity that favors the various iPhone models by $100 to $200 over Android devices with a similar hardware cost. That’s helping Apple keep its margins up even in a market glutted with competition from scores of Android models from various makers.

It also leaves carriers and other hardware makers fighting over the scraps of profit left, as most Android buyers aim toward cheap, low end models. Carriers like Verizon know that buyers interested in high end Android phones will pay virtually anything, so they’re marking those models up to be half again as much as Apple’s new iPhone 4S.

Android costs more, not less

When Google first began touting Android as an open source platform, pundits predicted that the wide variety of Android licensees would offer cheaper phones with differentiated, innovative features that Apple simply couldn’t compete with. Instead, Apple has consistently offered more attractive hardware at the same or lower prices, in part by negotiating higher subsidies in exchange for access to the iPhone.

For years, Apple has set a standard entry price of its newest smartphones at $199, with higher end models available with more storage. This year however, Verizon has set a new contract price for its high end Android phones at $299.

Both the Motorola Droid RAZR and the just released Google-branded Samsung Galaxy Nexus are $299 with a two year Verizon contract, and both are listed as costing $649 without a contract. In contrast, Apple’s 16GB iPhone 4S is offered for only $199, even though it costs the same $649 without a contact. Apple is getting a $450 subsidy, compared to just $350 for Android licensees Motorola and Samsung.

Apple’s $450 subsidy remains the same across the iPhone 4S range of 32 and 64GB models. The 8GB, $99 Verizon iPhone 4 has a full retail price of $549, also giving it the same $450 subsidy.

This has the effect of making the base model iPhones appear cheaper, and the higher end iPhones with increased storage appear to be about the same price as the base model, high end Android offerings.

Higher priced, lower end Android models

Verizon’s $199 Android phones, including the Samsung Droid Charge, Motorola Droid 3 and Droid Bionic, cost $499, $459 and $589 respectively without a contract, making their subsidies worth just $300 to $390, or $150 to $60 lower than Apple’s.

The closest Verizon’s phones currently come to an iPhone subsidy appears to be the HTC Thunderbolt, which is being offered for $149, a $420 subsidy compared to its $569 full retail price. However, this involves a special promotional discount of $100, making the “sale” price of Android models still higher than regular price of any of Verizon’s iPhones.

Discounted older Android models, such as the $79 Samsung Illusion, $99 Samsung Stratosphere and $149 HTC Droid Incredible 2 are listed with a full retail price of $329, $409 and $439 respectively, giving them a subsidy of between $250 and $310, or $140 to $200 less than Apple’s “low end” 8GB iPhone 4, despite their being roughly six to nine months newer than than the original iPhone 4 (albeit saddled with a 2.3 version of Android that is now a year old and lacking upgrade potential; the iPhone 4 runs Apple’s latest iOS 5).

Android is subsidizing Apple subsidies at Verizon

In 2010, the “year of Android” at Verizon, the carrier bet on Android as an alternative to Apple’s iPhone. Toward the end of the year, it found that it could not attract and retain subscribers as well as AT&T could with the iPhone, and subsequently agreed to carry Apple’s iPhone 4. In order to gain access to the iPhone, Verizon had to pay Apple a premium in subsidies.

Rather than pitting cheaper Android models against the iPhone, Verizon has marketed both in parallel; it simply charges more for Android, apparently in an effort to make up for the short term expense of iPhone subsidies.

Additionally, unlike new iPhone models that appear every year, Android licensees pop out new models every three to six months. This has created an upgrade cycle that forces down prices, something that is not in carrier’s interests. Because high end Android buyers seem to be price insensitive, Verizon can charge them significantly more to get the latest model at the $299 tier, then trickle down updates to the once standard $199 tier, rather than glutting their offerings with a large number of hard to differentiate models all priced below $100.

The end result is that Apple has an attractive enough product to demand a higher subsidy from Verizon and other carriers, starting the iPhone 4 and 4S at $99 and $199, a significant discount buyers will recognize, unless the are set on buying the latest Android phone to appear on the market. The lower subsidies that Verizon can get away with offering to Android buyers essentially helps it to offer iPhones for less.

Somewhat ironically, this means that Google’s Android is assisting Apple’s hardware business in a way that’s similar to how Microsoft makes more money licensing its IP to Android makers rather than selling its own Windows Phone 7 platform to them, or in the respect that some Verizon Android phones are shipping with Microsoft Bing as their default search service rather than Google’s own.

While Android is consistently being positioned as a threat to Apple in comparison to Microsoft’s Windows from the 1990s, Google’s efforts to push Android are actually funneling an additional $100 or more from each devoted Android consumer to ensure that carriers such as Verizon can offer iPhones for less by paying Apple a significantly higher upfront subsidy per phone. Microsoft Windows never similarly benefited Apple’s Macintosh platform.

31 comments

1 adobephile { 12.15.11 at 8:12 pm }

What seems to me to be different about the Android/iPhone and the Windoze/Mac dichotomies is that a lot of Windoze people got into desktop computers reluctantly or even “kicking and screaming”. They somehow dealt with their difficulties and probably more often than not “learned” only what they had to about them to get and keep their jobs.

I’ve been a Mac person since the advent of the Mac in 1984. I got into it out of genuine fascination and curiosity, and I’ve stayed a Mac person over the years, always looking to learn more and always looking for the improvements in the new machines.

With the Android/iPhone dichotomy, the iPhone came first, again, but there were still those who strangely shunned the iPhone or just hated Apple on some perverse principle and looked to Android for their “smartphone” fix despite Android’s “pale copy” foibles and weaknesses and relative complexities, or because is was “cheaper.”

Guess there’s no real accounting for the proclivities of the “unwashed masses.”

2 Berend Schotanus { 12.16.11 at 4:12 am }

What you are telling us is that the outcome of mobile device competition is determined by the quality of procurement strategy of large companies, which may or may not correlate to the quality of the actual devices. I think that’s bad news. It means the meritocratic market, in which producers act in consumers best interest, simply doesn’t exist. Instead of buying a device they really like, consumers will buy those devices that – for incomprehensible reasons – happen to have a good deal with Verizon or AT&T.

On the short run, of course, iPhone is a good device that people actually like. On the long run (I’m afraid) this kind of market mechanism will lead us back to the old kind of crap we’ve become so fed up with.

Maybe we can live in a better world. My personal preference still is to choose a telecom provider based on quality and value for money of their core service, without interference of devices or content that are really made by someone else.

3 adobephile { 12.16.11 at 4:34 am }

@Berend Schotanus
The conclusions you’re drawing are delusional and reactionary: sheer poppycock.

Definition of “meritocratic”: government or the holding of power by people selected on the basis of their ability.
• a society governed by such people or in which such people hold power.
• a ruling or influential class of educated or skilled people.

This has nothing to do with YOUR own twisting of that definition: “in consumers best interest”–this twisting being typical of propagandists’ desperate tactics in trying to control mob sentimentalities.

It has to do with Apple’s ability to command such deals with providers such as Verizon based simply on the demand for its iPhones–which is based on its ABILITY to produce a truly great phone which people want.

You’re crying about mere eventualities which haven’t yet and most likely won’t ever happen.

4 nextguy { 12.16.11 at 10:18 pm }

Actually, I think this is quite funny. Sprint pretty much is going bankrupt over the iphone, and Verizon is pretty much making nothing on it, seeing as how they have to pay more for it and get no advertising on it via their logo or software.

Of course, seeing as how the Galaxy Nexus is the only ICS phone out right now, they can make extra money off of it right now. And if that is the case with the Moto RAZR, then Apple isn’t the only one who can make high margins either.

“Google’s efforts to push Android are actually funneling an additional $100 or more from each devoted Android consumer to ensure that carriers such as Verizon can offer iPhones for less by paying Apple a significantly higher upfront subsidy per phone. ”

How you manage to say that Android is helping Apple in this case is crazy, but that’s what we come to expect from you.

5 Mike { 12.17.11 at 12:33 pm }

@nextguy

As it turns out, Daniel is actually true on the point of Android helping out Apple make more money. And that’s really all these companies care about, because market share means nothing if you make less profit by having more market share. So while Android may have higher market share in the US, it is ironic that the carriers decided to mark up the phones for Android to lure iPhone buyers. Nice commentary Dan, BTW.

6 nextguy { 12.17.11 at 4:21 pm }

Restating someone else’s conjecture doesn’t make his story any more plausible Mike.

7 jmfree { 12.19.11 at 8:06 am }

Dear Mr. nextguy:

Facts carefully collated and presented by others shouldn’t be upsetting.

But that’s what we come to expect from you.

8 nextguy { 12.19.11 at 7:54 pm }

@jmfree So let’s ignore several facts like

1. Verizon killing most of their employee discounts.
2. Eliminating their early upgrade discounts.
3. Greatly increasing their ETF
4. Reducing the return window from 30 to 14 days.

All happened right before the iphone debut on Verizon. Same for Sprint, who basically will go out of business with the iphone.

Next, his conclusion is based on false assumption that Verizon pays apple $650 for the iphone. This is the end user price, not what someone who buys in the millions would pay.

What next, Dell pays Microsoft $99 for a copy of Windows 7 Premium?

So please, spare me the pleasantries. All DED does is spin anything into something his readers can fap to.

9 nextguy { 12.19.11 at 8:17 pm }

Oh yeah, can’t forget those going for $300, like the Droid Razr cost $750 w/o contract or $735 for the Galaxy Nexus. Oh, no, facts, it hurts so much.

10 jmfree { 12.19.11 at 8:59 pm }

Except that, nextguy, the facts you cite never add up to anything.

It’s called quibbling.

Perhaps you could make your case better in your own blog. But you’d have to lose the petulant tone to get any readers.

11 nextguy { 12.19.11 at 9:12 pm }

Right. Here’s a little game for you. Guess who wrote this line?

“I’m the miserable asshole who wrote the article you tore to shreds to day because you were able to find a number of things to quibble about in it.”

Shouldn’t be hard to find. It’s so fun to quote that line, seeing as how you mentioned quibbling. Why don’t you see how those of us with brains we actually use find it so easy to find all sorts of logical fallacies in DED’s writings?

12 jmfree { 12.19.11 at 10:07 pm }

Oh, hey, thanks for that piece of enlightenment, nextguy.

So it turns out this is actually a multi-year flame war you’re all about, stretching all the way back to Usenet disagreements.

On display we find really outstanding name calling, pedantry, micro-analysis of who said what, who said it first, who misquoted whom, and something about somebody’s momma.

It’s so interesting that DED’s pleas for civility are targeted for classic schoolyard behavior: “IF I CAN MAKE EVERYONE HATE DANIEL, THEY’LL SEE I’M RIGHT AND HE’S WRONG.”

And you’re cheerleading for this?

That tells me all I need to know.

13 nextguy { 12.20.11 at 7:03 am }

Sure think jmfree. When someone rather come to the conclusion that Android is paying for Apple’s profits and Verizon subsidies than see that the Droid Razr and Galaxy Nexus are selling unlocked $100 more than the iphone hence the $300 subsidy price, yes.

And it isn’t the fact that DED was wrong, it was his reaction to it that’s most funny. What is even funnier is that there are a couple of articles here that are listed under Prince McLean, WHY?

14 jmfree { 12.20.11 at 10:30 am }

And in other news, Kim Jong Il is dead.

15 Maniac { 12.20.11 at 12:05 pm }

@ nextguy re: “Sprint pretty much is going bankrupt over the iphone, and Verizon is pretty much making nothing on it, seeing as how they have to pay more for it and get no advertising on it via their logo or software.”

You pretty much are forgetting the $2400 or so that Verizon iPhone users shell out over their two year contract. (Minus Apple’s cut, of course.) Seeing as Apple is raking in 2/3 of all profits in the mobile phone industry, pretty much every carrier is evidently willing to pay big money up front to get iPhone as their top-tier handset.

That tells you all you need to know. Pretty much.

16 pedrocandrade { 12.20.11 at 12:38 pm }

That’s an interesting view Dan, but I believe to reach a definitive conclusion we must look at the cost of the plan tied to the iPhone as well. In most countries I’ve seen, subsidized iPhones come with more expensive plans. It might be interesting to check this data deeper as the higher subsidies might be simply hidden in the monthly rate of the plan, even to make iPhone margins to operators similar to Android’s.

17 alansky { 12.20.11 at 3:39 pm }

The headline might just as well have read: “Verizon soaking high end Android buyers as punishment for being too dumb to buy iPhones instead.”

18 nextguy { 12.20.11 at 4:19 pm }

@Maniac Don’t get me wrong though, cutting Verizon out of the loop of their crap is great for the user. But aren’t you the people who say companies should aim for higher profit margins, not market share? For Verizon the pros outweigh the cons, if by that you don’t mind losing all the previous perks Verizon offered. For Sprint however, well, once LTE comes out for the iphone what will they do with all those billions they wasted on WiMax?

19 gslusher { 12.21.11 at 3:59 am }

@Maniac:

“You pretty much are forgetting the $2400 or so that Verizon iPhone users shell out over their two year contract. (Minus Apple’s cut, of course.)”

1. The Android phones also have data plans that cost about the same as the plan for the iPhone.

2. Apple doesn’t get a “cut” from the data plans. They stopped doing that after the original iPhone.

20 The Mad Hatter { 12.23.11 at 10:10 pm }

Dan,

I don’t think you looked far enough.

Motorola Droid Razr – 3 year – $99.00
LG Optimus 3D – 3 year – $0.01
Samsung Galaxy S Infuse S 4G – 3 year – $0.01
Samsung Focus – 3 year – $0.01
IPhone 4 8GB – 3 year – $0.00
IPhone 4S 16GB – 3 year – $159.00
IPhone 4S 64GB – 3 year – $369.00

Of course this is also the company that openly flies the skull and cross bones over their corporate headquarters (Rogers Communications).

Wayne
http://madhatter.ca

21 gslusher { 12.24.11 at 2:09 am }

@The Mad Hatter:

Perhaps you didn’t notice the headline nor read the story thoroughly: “Verizon soaking high end Android buyers to make up for iPhone subsidies”

It’s about Verizon in the US, not Rogers Communications in Canda.

22 enzos { 12.24.11 at 2:58 pm }

Actually, gslusher, Dan has many readers not in the USA who may be interested in the bigger picture. For example, I suspect that Apple is also gaining, in a same perverse sort of way, from Android entering the Australian market. The test will come when the smartphone market begins to saturate; to keep revenue growing in the sector Apple will need to take market share back from Android.

23 gslusher { 12.24.11 at 3:49 pm }

@enzos:

I know that. However, The Mad Hatter wrote that Daniel had not “looked far enough.” He didn’t write, “Here’s similar data from Canada that looks a bit different.” The Mad Hatter essentially said that Daniel hadn’t proved his point, but Daniel’s point was that Verizon was charging high prices for top-end Android phones, which he proved.

24 The Mad Hatter { 12.24.11 at 6:05 pm }

@gslusher

Please point out exactly where I said that Dan did not prove his point.

Wayne

25 gslusher { 12.24.11 at 6:31 pm }

@The Mad Hatter:

You wrote, “I don’t think you looked far enough.”

That is a negative criticism. “If you had looked further, you wouldn’t have written what you did.”

Enough.

26 marsviolet { 12.25.11 at 7:44 am }

Are nextguy and The Mad Hatter lovers?

27 nextguy { 12.25.11 at 11:03 am }

@The Mad Hatter, why are you posting facts here, trying to give people the big picture and making Dan look so narrow minded with his apple tinted glasses? Don’t you know they are as blind as he is?

28 The Mad Hatter { 12.26.11 at 10:51 am }

@gslusher

I was just pointing out that Verizon isn’t the only rip-off artist amongst the Telcos. Rogers might well be worse.

Wayne
http://madhatter.ca

29 enzos { 12.26.11 at 3:22 pm }

Re Dan’s definition of subsidy (non-contract – contract) gives a figure similar to that of so-called experts. http://tinyurl.com/49uxxh4
>The iPhone subsidy, at $400, is higher than the $200 to $300 that carriers pay for most smartphones, said Tina Teng, senior analyst for wireless communications at researcher iSuppli Corp. <

.. that's from January, so maybe you can accuse Dan of simplifyin an old story (in this case) and drawing an Apple-boosting conclusion. It's what he does and does very well judging from the ca. 10 million page-views RD gets per year.

30 dallasmay { 12.31.11 at 8:06 am }

Dan,

Verizon is not soaking android phones for the iPhone, they are soaking Android Phones for Android phones. Every few months they have a “Special” where you can get the bestest Android phones for deeply discounted or even free. How do they do that? Simple, they mark them up the rest of the year. Apple sets the price for it’s phone, so you never see the iPhone go on sale. That’s fine and good, but you are trying to make Apple look like they have far more power then they do. In fact, the opposite is true. Apple had to buy out their exclusivity agreement with ATT last year, and then had to PAY Verizon to put the iPhone 4 on their shelves. Apple had to do this because another year of being locked into ATT would have really hurt them.

The fact is, the ATT exclusivity agreement the SJ signed was the single worst mistake Apple has ever made. His arrogance, and his belief that the iPhone was 5 years ahead of everyone else and the carriers wouldn’t have another choice, cost his company dearly.

31 gslusher { 12.31.11 at 8:21 am }

@dallasmay:

1. Do you have any good evidence for your statements–not a rumor site, but actual evidence, like Apple or Verizon documents?

2. Your second paragraph is a blinding example of 20-20 hindsight. You have no idea what went on in the negotiations between Apple and ATT unless you were involved. Perhaps the exclusivity agreement was the only way that ATT would accept Apple’s terms, in which Apple, not the carrier, controls what is on the iPhone. No other manufacturer had ever had that sort of control in the US.

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