The brewing iPhone war: It's Apple vs. the carriers

Ma Bell and the Cupertino Colossus are prepping for a bloody fight over iPhone prices and subsidies -- it won't be pretty

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Why would a carrier change such a successful model? Maybe Stephenson thinks he said too much, because AT&T told me it has no intention of amplifying his remarks -- so we don't really know. But T-Mobile, which ditched contracts and subsidies earlier this year, is doing quite well, and its success has forced everyone in the industry to think hard.

iPhones lose competitive advantage

Now that every major carrier offers the iPhone and so many people already own a smartphone, the iPhone no longer supplies a competitive advantage, so losing margin points to Apple is more galling to carriers than in the past. As Stephenson said, he doesn't need a subsidized iPhone to bring in the customers.

Buyers are becoming increasingly price-sensitive, so ditching the subsidy would allow AT&T to compete with Verizon Wireless and the others by lowering the monthly charges. Indeed, AT&T already knocked $15 a month off the bills of customers whose contracts have ended (and thus their subsidies repaid), who buy their smartphones outright, or who bring an unlocked one from another carrier. That helps AT&T's monthly charges look better when compared to T-Mobile's pricing. I'd be surprised if Verizon doesn't follow suit.

Here's where it gets tricky. Although you're actually better off if you pay full freight for your smartphones in exchange for lower monthly bills, a fair number of buyers will balk at paying $650 to $850 for a phone, even an iPhone. It's simply too much cash to shell out all at once. T-Mobile's answer to that issue is interest-free financing, which of course isn't really interest-free, as Apple sells the iPhone to T-Mobile at wholesale for less than you pay at retail. But the total monthly charge looks a lot like it would for a subsidized iPhone at AT&T, Sprint, or Verizon.

From the carriers' viewpoint, iPhones have to get cheaper. That means the carriers will lean very heavily on Apple to cut wholesale prices. Because the iPhone represents a huge part of Apple's profits, Apple will be very reluctant to cut prices. Historically, Apple has accepted lower sales of Macs in exchange for higher margins -- it's a strategy on maximizing total cash earned versus total units sold; it seems to have the same strategy for iPhones and iPads. It's hard to imagine that policy changing, especially at a time when the company continues to be under pressure from Wall Street.

I suspect that Stephenson was launching a trial balloon in hopes of getting Cook's attention. Chances are he'll wave the T-Mobile card when he sits down with Cook. That is, he'll threaten to shift marketing muscle to Android smartphones. The carriers have tried that before, of course, with Android, Windows Phone, and BlackBerry devices, but it didn't work. The key reason was that, to a buyer, a $199 iPhone was worth the cost difference of a $99 competitor.

If the carriers stop subsidizing, that $199 iPhone suddenly costs $650, versus a $450 Google Nexus 5. Ironically, Samsung may get caught in the cross fire: Its bestselling Galaxy S 4 costs $600 unsubsidized, only marginally cheaper than a similar iPhone.

That fact explains why, in the most recent quarter, the iPhone accounted for just 21 percent of T-Mobile's smartphone sales, versus about 50 percent each at A&T and Verizon. Faced with higher upfront costs because there's no subsidy, T-Mobile customers simply bought cheaper Android smartphones. You can see why Apple wouldn't want the other major carriers to follow suit.

Now that the iPhone isn't such a big draw, Stephenson and his fellow execs at Verizon and Sprint have a lot less to fear from the Cupertino Colossus.

It'll be very interesting as the two sides get ready to rumble.

I welcome your comments, tips, and suggestions. Post them here (Add a comment) so that all our readers can share them, or reach me at bill@billsnyder.biz. Follow me on Twitter at BSnyderSF.

This article, "The brewing iPhone war: It's Apple vs. the carriers," was originally published by InfoWorld.com. Read more of Bill Snyder's Tech's Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.

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