Remember how AT&T had to give T-Mobile three billion dollars after it's failed merger was rejected by just about everyone, but specifically the FCC? AT&T's anti-trust argument for the merger was that T-Mobile couldn't survive without them. And that by allowing the merger, AT&T would be able to lower prices. No one bought it. And now T-Mobile is thriving without AT&T's help (well, the three billion dollars was nice). It has become the fastest growing mobile carrier.
What a colossal blunder by AT&T executives. Let's pause to consider again. They gave three billion dollars to T-Mobile for… nothing. It took that money, and didn't merge, and now is competing like a monster. Bet all those AT&T execs who thought up the merger were fired. No? They're still there? Really?
And guess what, AT&T is being forced to lower prices anyway, or at least pretend to in order to complete with the company they claimed wouldn't be able to survive without them. In particular, they are being forced to offer no contract plans. (Think they would have done that if the merger had happened?) Sam Mattera reports on subject for The Motley Fool:
Will AT&T's New Plan Crush Apple's iPhone Business?
But for some reason he puts an odd spin on the subject. While admitting that AT&T is being forced to compete because of the rise of T-Mobile, somehow this is all really bad for… Apple. (Did AT&T's PR department pick up the check at lunch, Sam? Or is it just good link bait?) Bad for Apple? No, Sam. In fact, the opposite is true.
Sam's strained argument goes something like this. No one will buy an iPhone without subsidies because they are too darned expensive. So if AT&T starts offering no contract plans, people are going to buy cheapo Android phones. So Apple will go bankrupt, or something. But all is good for AT&T, because it's still the Number 2 mobile carrier. Why should it worry T-Mobile is growing fast? All AT&T needs to do is lower prices a little, or pretend to. Oh, and allow customers to avoid long term contracts. See, no problem.
The truth is, Apple wins either way, but wins even better the more AT&T is forced to compete and lower prices. People buy iPhones because they really like iPhones and they are frankly the best phones available. And they're cool.
People also figured out a long time ago that iPhone's cost more. They get it. They understand why and they are willing to pay more. In fact, some people like paying more for a cooler phone. Makes them feel cool. They like it that losers can't have that phone. Kind of cruel, but that's the way it works in a capitalistic society. Rich (or richer) people get more. They get nicer things, like the iPhone.
The whole subsidy thing was actually pushed on Apple by AT&T. Steve Jobs was uncomfortable with the idea, and didn't want iPhone's subsidized, for all the right reasons. He wanted the iPhone to be a premium product, and he was nervous about customers getting screwed by long term contracts. Of course, AT&T wanted customers to get screwed by long term contracts, and they wanted to grow market share by taking advantage of their exclusive deal on the iPhone. Jobs ultimately gave in, because he didn't have that much leverage. Verizon wasn't willing to play ball with Apple (which is another story). Jump ahead, Verizon caves in, and subsidies become the standard way to get an iPhone.
Customers understand that long term contracts are lousy, but the temptation of getting an iPhone for $199 (or less) is just too great for most people. For Apple, subsidies don't hurt, because it allows for them to make the greatest phone possible, and customers can buy it for about the same price as a marginal Android phone. So in effect, the carriers are paying for Apple's R&D. Paying a lot.
This played out very obviously with the new iPhone 5S and iPhone 5C. Analysts bitched and moaned that both phones were too expensive, but they've been selling like crazy, especially… get this, the most expensive one. Given the huge subsidies AT&T, Verizon and Sprint pay, it would be crazy for Apple to have sold them any cheaper. In fact, through various deals you can get the new iPhone 5C for free. So why would Apple lower it's price?
Given the choice between a $199 iPhone 5S or a top of the line Android, most people are going to pick the iPhone. Given the choice between a $99 iPhone 5C and a middle run Android, most people will pick the iPhone 5C. And a free iPhone or a free Android? iPhone, please.
But what happens if subsidies go away? Sam notes that in other major international markets that don't have subsidies (i.e. India and China), Apple has a much smaller share of sales. Yes, in third world countries where people simply have no money, less are willing to dish out a premium for the iPhone. (Surprisingly, a lot still do.) But this is America, where more people have an extra $200 in their bank account. It's difficult to know for sure, but I don't think anyone should assume that a majority will refuse to pay $549 for an unlocked iPhone 5C because they can get an unlocked Samsung Galaxy for $349. If that was the case, Apple's iPad business would have disappeared, since there are much, much cheaper options. People who want an Apple product are willing to pay for it. If carriers want to make the choice easier, that's helps, but there is no solid evidence Apple will lose business. They've grown their market share by being the premium product.
More importantly, subsidies aren't going away, not any time soon. So Apple has the best of both worlds. There are plenty of rich people out there who, following Steve Jobs original vision, are happy to pay $849 for an unlocked gold 64GB iPhone 5S (in fact, let's buy three) and then shop around for the best carrier with no long term contract. And there are price conscious people, who know iPhones retain their value, and that they'll save money if they pay full price up front and then get the cheapest carrier deal. And there are people for whom subsidized iPhones are just too tempting to resist. Meanwhile, while claiming not to subsidize iPhones, T-Mobile offers "loans" where someone makes a downpayment on the iPhone they want and then has monthly payments in addition to their contract fees. It's simply a subsidy by another name. Sam argues those monthly payments are higher for the iPhone than an Android, but it seems even less likely someone is going to choose a phone they don't like to save $5 a month. Don't forget, the iPhone's initial meteoric rise in sales was when it was exclusive to AT&T and easily cost over $50 a month extra in connection fees. It's already been proven that people are willing to pay more per month for an iPhone. A lot more.
If, in some imaginary universe in the future, subsidies go away completely in the United States, then it's the carriers that need to be worried. US prices for monthly cell phone service are the most expensive in the world. In a completely unsubsidized market, monthly prices would surely shrink rapidly. That's what AT&T wanted to avoid when it fought Apple tooth in nail from selling unlocked iPhones. That's why it wanted to buy up T-Mobile and stop competition. The more AT&T is forced to compete, the worse it is for AT&T, because they simply don't know how. They hate their customers too much. They are too invested in price gouging. That's why, on their sales floors, they would try to bait and switch customers who came in for the subsidized iPhones. It was common for AT&T salespeople, and Verizon, to argue like crazy to talk less informed customers into buying Android junk that had a much smaller subsidy. So the lure of Apple subsidies was often used to sell barely subsidized Androids. Some of those games disappeared when Sprint began pushing iPhone's like crazy. T-Mobile is also winning customers by being straight forward about iPhones costing more.
The more competition between carriers, the stronger Apple is because it is all about keeping customers happy, not making short term money on scams. The less money customers waste on over paying for phone service, the more they have to spend on quality Apple product. It's funny how AT&T keeps trying to say that customers have all these "choices" for their services. Customers don't want choices for cell service. They simply want it cheap. They do like choices of cool products from Apple, however. Detach iPhones from the fake "choices" AT&T offers, by losing subsidies, and AT&T has nothing to offer other than low price. It becomes the dumb pipe it's exes were always worried about. That the T-Mobile merger was supposed to prevent. It was supposed to prevent Apple from becoming too strong.
In the unlikely event that US customers become price sensitive on the hardware side, Apple could turn on a dime and start offering cheaper phones that were still delightful and fun. The plastic iPhone 5C was obviously a test in that regard. But even in a completely unsubsidized market, large numbers of people would still pay extra for high end iPhones. People with less cash are more likely to buy refurbished iPhones, and save money in monthly service fees so they can afford to buy a new one later. Since they have a hirer resale value, iPhones become cheaper than Android junk in the long run also. If customers are really forced to make all considerations based on long term value, there is even a larger case to be made for the iPhone. If you change phones every two years, you can take a chance on something new, like a pretty Android with some silly new feature like a larger screen. If people start making five year choices of phones, iPhones are a much safer bet. Apple products are known to last long. Part of the reason AT&T had to give in on offering no contract deals was because of the large number of used iPhones that still work better than the newest Androids. If AT&T didn't offer no contract service, those phones would all float to T-Mobile.
Like that three billion dollars.