Much like the iPod before it, the success and vision of the iPhone forced a slew of companies to step up their game in a serious way, but in the end, no competing device has yet been able to hold a candle to Apple’s offering. From a business standpoint, Apple’s success with the iPhone is similarly difficult, if not impossible, for competitors to emulate.
SeekingAlpha recently took a look at the gross margins of the iPhone measured against those of RIM and Motorola’s and unearthed some interesting findings. After doing a bit of number crunching, SeekingAlpha found that the gross margin per iPhone sold is more than double that of RIM and Motorola devices combined. Put differently, the amount of money added to Apple’s bottom line for each iPhone sold is twice as much as Motorola and RIM can muster up together. That being the case, it’s no surprise at all that the iPhone is responsible for the bulk of Apple’s profits – an unbelievable feat for a product that’s not even 4 years old, and a testament to the revolutionary impact of the device.
Naturally, the main reason behind Apple’s financial windfall with the iPhone is the simple fact that the average selling price per iPhone is $606. Of course, customers aren’t generally aware of the true cost of an iPhone thanks to carrier subsidies.
So what allows the iPhone to warrant such relatively outrageous subsidies? Well first, note that RIM and Motorola often subject their smartphones to deals you’d never see from Apple, like “Buy 1 get 1 free!” promotions. Still, SeekingAlpha itemizes three features – unique features, a thriving app store, and the halo effect – which it argues contributes to Apple’s lucrative subsidies.
Let’s take a look at each.
First, unique features. There’s no denying that the iPhone, by and large, remains the top smartphone on the market today. Sure, you can argue about openness on Android and how great BlackBerrys are for emailing, but at the end of the day, the iPhone is far and away the most attractive consumer smartphone available. Furthermore, Apple has proven quite adept at consistently iterating its iconic smartphone with new features that keeps users upgrading their device year after year.
Next up we have the thriving iTunes App Store, though to be fair, the iTunes App Store is part of the reason why the iPhone is so unique. With hundreds of thousands of apps, users can easily extend and improve the functionality of their device, often times for free. Sure, many of the top mobile apps are available on a number of platforms, but the sheer number of iPhone apps ensures that some cool apps will inevitably remain iPhone exclusives. Netflix, for example, has yet to come out with a universal app for Android, while some other developers, like Smule, have made an economic decision to stick exclusively with Apple’s iOS platform. And though the number of apps available on Android continues to increase, there are still only 90,000 apps available for download, and depending on the app, not every app works on every Android handset.
Lastly, we have the halo effect theory which postulates that the rise of the iPod and the growing popularity of the Mac continue to draw more people into the iPhone realm. This is an interesting point, and while there’s no doubt that the iPod made Apple a household name again, the success of the iPhone most likely provides a halo effect for Mac sales than the other way around. The reality, though, is that the success of each inevitably feeds into the success of the other. Whether the iPhone or the Mac is responsible is ultimately irrelevant. What does matter is that the iPhone continues to thrive, and with a Verizon iPhone 4 launch set for the first half of 2011, along with the iPhone 5 presumably set to drop sometime this Summer, Apple’s iPhone success may just be getting started.
So taking all of the above factors into consideration, AT&T is willing to pay top dollar to subsidize the iPhone because they appreciate that it’s attractiveness and uniqueness as a smartphone is the best way to currently attract subscribers away from other carriers, which in the cell business is what it’s all about. Sure, keeping customers is no big deal, but having a product capable of influencing millions to abandon their carrier of choice for AT&T is no small thing.