Will Apple Be Forced to Launch Cheaper iPhone In Markets Without Carrier Subsidies?

The Wall Street Journal has published an interesting article which details the iPhone's weak performance in countries where carriers don't subsidize the sales of handsets.

Although Apple sold a record 37 million iPhones last quarter, most of these sales were in markets like the U.S. and U.K., where carriers offer a subsidy on the device.

In European countries like Greece and Portugal, which are in the middle of an economic crisis, an unsubsidized $680 iPhone 4 (yes, the older iPhone 4) is a distant purchase for most. Not surprisingly, the iPhone accounted for less than a tenth of the smartphones sold in these countries. Even the "free" iPhone 3GS sells for a steep $535 in Greece, sans contract of course.

This is where cheaper Android based smartphones swoop-in, and increase Google's smartphone market share:

Android phones that cost less than $200 without a contract are widely available in Europe, helping Google undercut the much more expensive iPhone. In Portugal, at wireless carrier Vodafone Group PLC, the cheapest Apple phone—an eight-gigabyte version of the older-model iPhone 4—sells for $680, according to the carrier's website. Phones running Android can be had for as little as $106, and even Samsung Electronics Co.'s high-end Galaxy S II is cheaper than the cheapest iPhone.

In fact, even Nokia is targeting the low-cost smartphone market, with an entry level Lumia phone that would sell for $250.

The report also quotes Spanish carrier Telefonica's CEO, who says that they're having second thoughts about the carrier subsidy model:

"We can't keep subsidies at these levels. When you buy a TV or any other consumer good, you pay for it. It is healthier that users pay for their devices and operators invest in networks and services."

Apple's strategy to sell phones has been designed with the post paid, contract based model in mind, which is why the iPhone doesn't hold much market share in pre paid markets.

The company definitely needs to rethink their strategy for unsibsidised markets, unless it wants to do a repeat of the disastrous pricing seen when the iPhone 4S launched in India. (The cheapest iPhone 4S sells for $900 in India through carriers.)

And although subsidies won't go anywhere in markets like the U.S. anytime soon, SAI's Henry Blodget raises a valid point:

Of greater potential concern for Apple is what could be a trend toward carriers reducing or eliminating subsidies.

[...]

Apple's profit margins on the iPhone are nothing short of remarkable, especially relative to the profit margins of its competitors.

One reason the company is able to sustain those margins, however, is the carrier subsidy model, which makes consumers much less sensitive to handset price.

If the subsidy model begins to break down, Apple could be forced to cut prices, thus eating into its margins.

Eventually Apple will have to venture into these markets, unless it wants the iPhone's growth to stagnate, which means either new iPhones would have to be introduced at cheaper price points, or existing ones would have their profit margins reduced.

Apple seems to tackling this issue one market at a time right now, with China being on the top of the list.

[via WSJ]