Samsung and Apple are the biggest manufacturers of smartphones, but China's state-run wireless operators will pose a threat to their business models. China Mobile Ltd said it will cut subsidies by $2 billion, while other competitors are cutting as much as $1.9 billion. This will impact the upcoming Galaxy Note 4 as well as the iPhone 6.
Subsidies make expensive phones reasonable by offering the phone at a lower price while locking in the customer to a long term contract. So for example, a phone that might cost $800, would only cost the customer $100 with a subsidy. Both the Note 4 and the iPhone 6 are likely to retail for over $800, so how will consumers take to these higher costs? Probably not too favorable. While the consumer might not have to pay the for the full retail cost, it will still be a lot higher than the $100 they are used to.
I think everyone is in favor of getting rid of subsidies. T-Mobile has taken the lead here in the U.S., but the bottomline is that companies like Samsung and Apple won't be able to profit as much in a non-subsidy world. At the same time, companies like Xiaomi make a fantastic product at an attractive price so we know it's possible.
source: Bloomberg
