Device subsidies are keeping prices on phones and monthly service abnormally high.
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Canada’s Competition Bureau is intensifying its probe of Apple and the company’s iPhone business by demanding details from wireless carriers about how they price and sell the device.
Alas, the competition watchdog is close, but it’s unfortunately barking up the wrong tree. Wireless contracts are the real problem.
As it stands, the Bureau is trying to find out whether Apple imposed contractual obligations on wireless carriers that had an anti-competitive effect on the prices consumers pay for devices and monthly service.
To that end, the watchdog has now filed requests with the Federal Court of Canada seeking information from eight wireless carriers.
As The Globe and Mail reports, the Bureau has asked Rogers to detail:
“How it sets retail prices of iPhones; how it establishes its wireless service plans for use with any type of smartphone; and the number of handsets shipped or sold on a monthly basis as well as discounts, promotions or rebates provided to Rogers under its agreements with suppliers other than Apple.”
The bureau has had similar conversations with the other carriers as well, the newspaper reports.
It’s impressive that the Competition Bureau has happened onto this issue because there certainly is a problem. But it isn’t so much with Apple itself, nor is it endemic to Canada.
The problem lies with the phone subsidies that carriers in many countries give customers in exchange for signing on to long-term wireless contracts.
I’ve written before about how such subsidies and contracts are anti-competitive, and how they distort the market and raise prices.
Virtually no other category of electronics is sold in this way. Consequently, every other category of electronics usually sees fierce price competition. Prices go down, rather than up.
The basic model of the first iPhone cost $599 (U.S.) when it was introduced in the United States in 2007. Two months later, then-chief executive Steve Jobs cut its price to $399 after outrage from would-be buyers.
Today, the basic model of the iPhone 6 costs $649 in the U.S., a 62-per-cent increase over that adjusted initial price.
Apple’s margins on iPhones, meanwhile, are estimated to be somewhere between 50 and a whopping 70 per cent. Not surprisingly, estimates figure up to two-thirds of the company’s profits come from the mobile devices.
Profit margins on televisions, in comparison, have been estimated at between 10 and 20 per cent. With that, it’s no surprise that so many of the Japanese TV giants, including Sony, Panasonic and Sharp, have been posting such heavy losses in recent years.
What accounts for such a dramatic difference in margins? Subsidies.
Apple, other smartphone makers such as Samsung and wireless carriers around the world use subsidies to mask the true cost of their devices, Without those subsidies, the prices – and therefore the margins – on those phones would be much closer to that of TVs and every other category of hardware.
Smartphones would be exposed to the open market and consumers would likely balk at the idea of paying $650. It’s a safe bet that without subsidies, smartphones would cost a couple of hundred dollars at most – and that’s without a contract.
And if consumers didn’t have to sign on to wireless contracts and could buy cheaper phones more frequently, monthly service prices would likely be a lot lower too. Consumers would be switching providers more frequently, so the carriers would have to be more competitive.
Apple, which derives so much of its money from the iPhone, would be a very different company under this scenario. It would be a much smaller, less rich company.
The Competition Bureau is right to assume there’s fire where there’s smoke. But it isn’t Apple alone that’s causing it.
If the watchdog really wants to break up the anti-competitive business that is wireless service and devices, it should take action against phone subsidies and contracts because smartphone makers and carriers alike have been riding them all the way to the bank.
Sooner or later, regulators in other countries are going to start realizing this too.