The cheap iPhone is already here, if Americans can do the math

January 11, 2013
Obsession
Mobile Web
January 11, 2013

Starting today, Walmart is offering Americans by far the cheapest option for purchasing an iPhone and wireless plan. Customers can buy the iPhone 5 at its wholesale price of $650, which is steep, but then save lots of money over time with an unlimited data plan that costs just $45 a month and doesn’t require a contract.

It’s the latest, most significant pre-paid plan for Apple’s iPhone in the United States, but the question is whether Americans will be willing to do the math to glean how much they stand to save. So far, the evidence suggests they won’t.

Walmart is offering its dirt-cheap plan through TracFone Wireless, a subsidiary of América Móvil, the wireless arm of Mexican telecom magnate Carlos Slim. The only other pre-paid plans for iPhone in the US are offered by Leap Wireless, under the Cricket Wireless brand, and Sprint Nextel’s Virgin Mobile USA.

The math behind these plans isn’t very complicated. Here’s how Walmart’s offering for the cheapest iPhone compares to the equivalent from AT&T:

Walmart: $650 for the phone + $45/mo. for unlimited data = $1,730 over two years
AT&T: $200 for the phone + $85/mo. for 1 GB of data = $2,240 over two years

That’s savings of $510 over two years, or 23% less than AT&T’s offering. Put another way: Walmart is offering about the same discount as the “cheap” iPhone that Apple is rumored to be working on, which could cost about $500 less than the least expensive iPhone currently on the market.

But math is one thing, and psychology is another. There are signs that Americans simply can’t get over the large, upfront cost required when signing up for pre-paid plans, which are standard in many countries but less common in the US. Americans are accustomed to signing two-year contracts with their wireless providers, which discount—or, in industry jargon, subsidize—the phone in return. Pre-paid providers, which don’t require contracts, can’t do that.

Take, for instance, Leap’s pre-paid iPhone plan, which is very similar to Walmart’s. It appears to be a dud so far. In May 2012, Leap heralded “compelling differentiation” from the larger wireless providers that offer the iPhone, but the company declined to provide any sales figures in its most recent quarterly report. To address the lackluster consumer response, Leap said it was introducing financing plans “to help customers afford higher-priced devices.”

Walmart, too, is offering the option of paying $25-a-month installments for the phone at no interest, which, along with the data plan, will let people pay $70 a month and nothing upfront for the phone. That could prove more palatable.

The major carriers are clearly watching to see if Walmart has any success selling high-end smartphones with pre-paid plans. T-Mobile USA, a unit of Deutsche Telekom, will carry an unsubsidized iPhone later this year, and the CEOs of Verizon Wireless and AT&T Mobility both said this week that they would like to end subsidies, if they can.

A lot of that depends on whether Americans are ready to dust off their abacuses and recognize a discount for what it is.

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