How much did the operators pay for the iPhone? – Data interpretation

How much did AT&T and Verizon (hereinafter referred to as AT&T) pay for iPhone 5 from Apple? How much did they subsidize consumers? This has always been a mystery, and no official document has ever revealed this mysterious number. A widely circulated saying is that AT&T's purchase price is basically the same as the full MSRP price that consumers buy, which is $649. AT&T offers a $450 carrier subsidy and a $199 contract price to attract consumers to sign a two-year contract, and recovers costs by charging a two-year service fee of $1,440 to $3,360.

However, did AT&T really pay $450 out of its own pocket to subsidize consumers? Is AT&T really being a Lei Feng by selling the phone to consumers at a bare metal price of $649?

No, they only subsidized $362!

Here’s an explanation of how we arrived at the $362 figure.

In August 2010, Apple and Samsung had a well-known lawsuit. In this lawsuit, many data that would not be provided voluntarily before were released. Among them, Apple's iPhone sales and revenue over the years. We intercepted a period of time, in the fourth quarter of 2011 (the first quarter of the iPhone 4s release), Apple sold 15.073 million iPhones (including direct sales to consumers and operators), with a revenue of US$9.39 billion. So, from Apple's perspective, the average selling price of the iPhone in that quarter was US$623.

In the first quarter of the iPhone 4s release, due to tight supply, most phones were sold to operators under contract. So we assume that the price of $623 is basically the average purchase price from Apple by operators.

Of course, this quarter's iPhone models include iPhone 4s, iPhone 4, and iPhone 3gs. According to a survey report by Consumer Intelligence Research Partners (CIRP), 89% of users chose 4s, 7% chose 4, and 4% chose 3gs. Based on Apple's consistent pricing rules, we assume that the carrier purchase price of iPhone 4s is x, iPhone 4 is (x-100), and iPhone 3gs is (x-200).

Then, let's solve a linear equation:

x * 89% + (x- 100) * 7% + (x- 200) * 4% = $623 ——–> x = $638

The average purchase price (ASP) of iPhone 4s in the quarter was $638. In fact, the figure of $638 is very close to the data in the circulated version. However, what most algorithms ignore is that this average purchase price includes 3 different capacity models: 16gb, 32gb, and 64gb! The sales ratio of these three different capacities in that quarter was 45% - 34% - 21% (the same report pointed out). Let's assume that the ATT purchase price of 16gb is y, and 32gb and 64gb are y+100 and y+200 respectively. Let's solve a new equation.

Y* 45% + (Y+100)*34% + (Y+200)*21% = $638 ——–> Y = $562

From this, we can calculate that the iPhone 4s 16gb purchased from Apple by operators represented by ATT is only $562! Instead of $650! Based on Apple's stable iPhone pricing strategy in the past few years, hardware costs (4s and 5 are both around $200) and revenue data (ASYMCO data source), we can basically assume that the purchase price of the iPhone 5 16gb by operators is also about $562, and the corresponding purchase prices of 32GB and 64GB are $662 and $762 respectively.

So our conclusion is that AT&T and Verizon did not subsidize the contracted users by $450 as they claimed. In fact, they only subsidized $362. And when they sold the bare phone to users at $649, they were not being unscrupulous. They also made a profit of $87 on each bare phone.

Of course, it is more cost-effective for Apple to sell directly to consumers than to operators, and Apple can earn an extra $87. Assuming that all the iPhone 5s sold are sold as bare metal, Apple's revenue will increase by $17.4 billion. This also explains why Apple has been selling contract-free phones directly from the 4s, bypassing operators.