This is a portion of the analysis that slacker didn't include from Ben Thompson.
stratechery.com
The knee-jerk reaction of many, particularly Apple bears, was to paint this as the end of subsidies. This, of course, is nonsense.
First off, as Jean-Louis Gassee notes today, the very word “subsidy” is problematic:
I don’t know if Stephenson is speaking out of cultural deafness or cynicism, but he’s obscuring the point: There is no subsidy. Carriers extend a loan that users pay back as part of the monthly service payment. Like any loan shark, the carrier likes its subscriber to stay indefinitely in debt, to always come back for more, for a new phone and its ever-revolving payments stream.
As Horace Dediu has written multiple times, most recently today on LinkedIn, subsidies are the carriers best friend.
It may be an illusion, but a cheap phone (with a long-term contract) is a fundamental innovation devised by telco operators even before the phone became mobile. Operators have come to love it and no matter how many technology generations go by; how many family plans, bucket plans, weekend minutes, rollovers, and data packages; no matter how many tweaks and re-brands the model gets, it will persist. There simply isn’t sufficient win-win value in alternatives.
The iPhone is a particularly special case: as I wrote last April, it not only helps carriers sell network access – as does any smartphone – but it also punishes carriers who refuse Apple’s demands by virtue of Apple’s customer loyalty:
- The carriers see the iPhone as a strategic threat because Apple owns the customer relationship; the carrier is reduced to a utility. Therefore the leading carriers do not carry the iPhone
- Customers strongly prefer the iPhone; in fact, they prefer it so much that they switch carriers to get the iPhone (something that is very difficult and rare). Second-and-third place carriers add the iPhone in order to steal customers from the leader
- The leading carrier is forced to choose between losing the customer relationship to Apple or losing the customer completely.
The fact that iPhone users are fabulously profitable makes this situation (and the associated subsidies) tolerable. |
