Ever since the iPhone first came out, many cost-conscious
consumers have found it to be prohibitively expensive. Now,
Apple
(Nasdaq: AAPL) is making a
strategic shift to open up the iPhone
to an even wider audience of those who are smarter about
understanding what they're spending. That's good news for
consumers, but it poses a big threat to
AT&T
(
T
) and
Verizon
(
VZ
) -- and Verizon has responded in exactly the wrong way.
The endless march of technology
New technology has always had an adoption curve. Early adopters
are willing to pay nearly anything to get their hands on the
latest gadgets. Once the best products rise to the top of the
heap, another wave of more patient buyers comes in to grab up the
most reliable top performers of the bunch. Last but definitely
not least, cost-conscious customers wait for prices to come down
to snap up bargain-priced devices, giving up the state-of-the-art
for the reasonable performance that older technology still
provides.
For computer makers
Dell
and
Hewlett-Packard
, the inexorable march toward technology commoditization has
given them direct struggles to sell their products. But with
smartphones generally and the iPhone in particular, exclusive
deals from mobile carriers and subsidized phones with locked-in
contracts obscured the true cost for many consumers, leading to
delays in the playing out of the product cycle.
Here's how it worked: AT&T -- and later, Verizon and
Sprint Nextel
(
S
) -- sold iPhones at relatively low prices. Yet with the phone
came a
commitment to paying for two years of service at
arguably inflated rates
. By locking customers in and charging big early-termination fees
to get out, Apple collected much higher prices for its iPhones
from the carriers, while the carriers eventually got paid back
through contract payments.
Early adopters may not have cared about all that. But the
bargain crowd looked beyond the $199 upfront cost of the phone to
the potential of paying as much as $2,600 for two years of
cell-phone service -- and happily waited for a
more reasonable solution to present itself
.
Rise of the bargains
Now it appears that Apple is finally doing what it should have
done all along: pitting providers against each other to make as
many people as possible interested in buying the iPhone. With
both
Leap Wireless'
(Nasdaq: LEAP) Cricket and Sprint's Virgin Mobile about to offer
the iPhone 4S -- the newest model currently available -- Apple is
signaling a desire to focus price competition on the service side
of the smartphone equation.
Cricket and Virgin offer a trade-off
. You'll pay Cricket $500 or Virgin $650 for an iPhone 4S, but
you won't be locked into expensive contracts. Cricket offers an
unlimited plan for $55 per month, potentially bringing the
two-year service cost down to $1,320. At $30 per month for
unlimited text and data, Virgin is even less expensive -- $720
for service or $650 for a Virgin iPhone.
Nothing's stopping AT&T and Verizon from making similar
moves. Instead, though, Verizon decided to give up on its low-end
users by implementing its Share Everything plan, which will
eliminate limited-minute voice plans in favor of more expensive
unlimited-voice plans. Many expect AT&T to do something
similar in the near future.
What should you do?
High-end users who'd find the Cricket and Virgin offers
insufficient will probably be happier to stick with AT&T,
Verizon, or Sprint's own offerings. It's far from clear whether
Cricket or Virgin will offer the iPhone 5 as quickly as the three
premium carriers, which could be a big sticking point for those
who've gotten used to swapping up for upgrades every two
years.
But for price-conscious shoppers who've avoided iPhones
because of the huge expense of service plans, Virgin and Cricket
could well change things. More competition among mobile providers
is good news for customers -- and for Apple.
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Fool contributor
Dan Caplinger
just may have an iPhone in his future now. He doesn't own
shares of the companies mentioned. You can follow him on
Twitter,
@DanCaplinger
. The Motley Fool owns shares of Apple.
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