Why Talk of a $1000 iPhone is Overblown

on September 7, 2017
Reading Time: 3 minutes

There’s been a lot of talk about Apple releasing a $1,000 iPhone next week, and a lot of pushback from financial analysts in particular on the idea that people would actually buy such a thing. Carolina shared some data yesterday from a recent survey about people’s attitudes towards buying a higher-priced iPhone, which showed a mixed picture at best. But the reality is that talking about a phone in these terms is a bit old-fashioned at this point regardless of the actual price, especially in a US context.

Installment Plans and Leasing are Now the Norm

In the US, the vast majority of premium smartphones are sold through the major wireless carriers, with the largest four being AT&T, Sprint, T-Mobile, and Verizon Wireless. Each of those companies has been through a transition over the past few years away from the traditional subsidy model, under which customers paid a portion of the price of a phone up front, to a combination of installment and leasing models, where the cost of the phone is broken up into monthly payments. The exact percentage of sales off the old subsidy model varies by carrier, but all four are now above 75% with several over 80%. This is how people buy phones now in the US, and it’s not about the full retail price.

Further, the new model gives the carriers quite a bit of flexibility with regard to how they actually set the monthly payments, because they can be spread over a variety of different time periods and discounted (and, yes, subsidized) in various ways to attract customers, especially in the context of a hot new phone. So a leasing plan from Sprint might have a very different monthly price from an installment plan from Verizon even for the exact same phone. But all of that will be expressed in the form of monthly payments and not a full retail price.

The Samsung Note8 Launch Gives Us a Sneak Preview

The recent Samsung Note8 launch gives us something of a sneak peak at how a $900-1000 phone actually gets priced and sold in the US market. Here’s a sampling of prices from the major US carriers:

  • AT&T: full retail price: $949; monthly price: $31.67 for a 30-month installment plan with option to trade in after 2 years; $39.59 to trade in after one year
  • Sprint: full retail price: $960; monthly price: normally $40 but currently $20 as part of a special offer, for a lease with option to trade in after a year
  • T-Mobile: full retail price: $930; monthly price: $210 up front and $30 per month over a 24-month term, with an offer to buy one and get one free during preorders
  • Verizon Wireless: full retail price: $960; monthly price: $40 for two years.

Compare that to current monthly prices for the base model iPhone 7 Plus, a phone that costs roughly $200 less to buy outright, which run from $25 to $36, and you’ll see that the real difference in price between a $770 phone and a $1000 phone isn’t $230 for most customers but a monthly price difference of anything from zero to $15. On top of that, bear in mind that the new iPhones are likely to be the biggest carrier switching event the US market has seen since 2014, so we’re going to see a lot of discounts, offers, and other promotions which lower the effective price even further.

So really any survey that asks about a thousand dollar iPhone is asking the wrong question: the real question is whether customers are willing to pay a little extra (or perhaps none at all) for a great new phone. Which is why Phil Schiller showed this slide during the iPhone pricing segment of last year’s event:

This is the framing you can expect to see from Apple next week: affordable-looking monthly pricing, with the new phone probably coming in at around $40, or $8-10 more than the iPhone 7 Plus. And that’s going to be a lot more palatable than the “$1000 iPhone” headlines will lead people to believe.

One Last Note on iPhone Pricing Surveys

One last thing that’s also worth mentioning is the very nature of surveys that ask about theoretical prices for as-yet unreleased devices: they’re historically terrible as predictors of what people will actually pay in the real world for devices they have seen. Ask someone whether they’ll pay $1000 for a new iPhone they in many cases know nothing about (and might reasonably assume will be an on-par successor to the current iPhone lineup) is always going to lead to unrealistic responses. But ask them next week whether they’ll pay a few bucks extra per month for the iPhone Apple just announced with all its usual fanfare, whiz-bang demos, and so on and you’ll get a very different answer that’s likely a lot closer to what we’ll actually see in stores. Now it’s just up to Apple to sell us all on that device on stage next Tuesday.