iPhone 4S pre-orders: they aren’t that big of a deal

Following the October 7 online launch of the iPhone 4S, Apple reported that over 1,000,000 iPhone 4S’ had been pre-ordered in the first 24 hours, besting the previous record held by the iPhone 4 which had pre-orders to the tune of 600,000. Now of course this is a good bragging point for Apple, showing that the “greatest iPhone we’ve ever made” sold 400,000 more units the same amount of time than the previous model, but when looking into the specifics of these numbers, they’re not as shocking as they’d seem at first glance.

When the iPhone 4 launched in June of 2010, it was an exclusive for AT&T in the United States, and it was only available in one color, black, and two sizes, 16 and 32gb. With these limited options, the result was 600,000 units pre-ordered in 24hours.

Fast forward to October 2011. Sprint (which has never had an iPhone before) and Verizon are now on the carrier list with AT&T, its launching in both black and white, and has added an increased capacity 64gb model. Even with all of these increased options, only 1,000,000 units were pre-ordered (obviously 1mm units is an astronomical amount, but lets keep it in perspective).

So when putting it into perspective, is the 1,000,000 pre-order really that impressive when comparing to the astronomical number of 600,000 on just one carrier a year ago? I’d venture to say no, its really not as impressive as it seems. Even with drastically more configuration options, availability on the 3 largest carriers in the US, and the ever-exponentially-increasing number of people moving to smartphones (read: market share slices aren’t getting smaller, the pie is getting bigger), the orders are only up 400,000.

Given the updates and options this time around, I personally would have expected much higher pre-order numbers. Here are a few reasons why. First off, AT&T is throwing contract-renewal $200 upgrades to nearly every iPhone 4 owner. If you’re on AT&T and bought the iPhone 4 in 2010, you’re more than likely being offered the subsidized 4S. Second, I would assume that many potential iPhone buyers on Verizon would have held off on the iPhone 4 launch in February in order to buy the next iPhone. Verizon hadn’t ever really released good numbers for the iPhone 4 sales, and it was quite a soft launch. Because of this, we’d expect the 4S sales numbers on Verizon to be quite large. Lastly, this is the first iPhone to ever hit Sprint. Although Sprint is much smaller than Verizon and AT&T, the pent-up demand for the iPhone among customers on Sprint has to be astronomically high. Sprint is offering $70 unlimited (!!!) plans with the iPhone 4s, and most people who have been on Sprint with their early Android offerings from 2010 are due for a contract upgrade at this point.

Only time can tell how the overall sales numbers will be in the coming months, but looking at these pre-order numbers, I’m far from blown away.

The wireless industry is out of control.

Honestly, I don’t think that wireless consumers in the United States understand how bad they have it. There are 3 distinct tiers (levels) of carriers in this country, and consumers are being pretty much royally screwed by the first 2.

At the “premium” or first tier, we have AT&T and Verizon. They boast large nation-wide voice and data networks, with generally solid coverage. The problem is the price. We’re talking $100+ per month for one line of service, and even at this price were still talking limited voice minutes and data allowances.

What I would consider the second tier of wireless carriers is Sprint and T-Mobile. Although they both provide national coverage, it is not nearly as reliable (as far as land mass covered) as the first-tier, and their prices reflect that. On average consumers can expect to pay about $30 less for comparable plans on these carriers.

The third tier is comprised of regional carriers (Think Cincinnati Bell, U.S. Cellular) and pre-paid MVNO’s (Mobile Virtual Network Operators, who piggy back on the major carrier’s networks, think Virgin and Boost Mobile). These lower tier offerings often have no contracts, lower end devices, and limited plans or coverage areas. The bonus with these carriers are rates 50% or less of what first tier carriers are charging

So given this many options (notice I said options, not competition), why am I stating that consumers today are being ripped off? The reasons are many, but I’ll work up a short list. The first issue is devices. With only the top tier carriers receiving the newest and best devices, consumers who want a high end (or new) device, they will automatically be drawn to AT&T or Verizon. For example, keep in mind that the iPhone is (currently, we’ll see on Oct. 4) only available on these 2 carriers. The next issue is coverage. Consumers looking for a new cell phone or carrier will check how the service is in their area. Not only where they live but where they work and other places they frequent. Chances are unless you live in a big city you won’t have great service in all 3 areas on a non top-tier carrier. Even Sprint and T-Mobile have seemingly random dead zones in largely populated areas. The third (and biggest/most underestimated) problem is CDMA and locked GSM. Now I won’t bore you with the intricacies of the technologies but what it comes down to is AT&T (and T-Mobile) being on GSM (SIM cards), and Verizon (and Sprint) being on CDMA (no SIM cards). This inevitably leads to devices that can ONLY be used on one carrier, and never switched. If you want to change carriers, you must buy a completely new device. So even if you’ve braved the 2-year contract or opted to pay the ETF (early termination fee) to leave, the device is now useless.

These problems (along with countless others) all lead to the biggest issue: price. Because of the current market conditions and lack of competition, AT&T and Verizon are slowly gaining customers and market share, and smaller wireless providers are either losing money every quarter (see: Sprint) or being sold/purchased (see: T-Mobile). This all means that Verizon and AT&T are the only 2 companies that can often provide what consumers want. And unfortunately for us, this means that having a smartphone in today’s marketplace means $200 up front for the device, a 2-year contact including a $300+ ETF , and at least $100 per month for service.

This model is unique to the USA and is in extremely stark contrast to the situation in Europe. First off in Europe, all phones are GSM and all carriers operate on the same frequency bands (all interoperable). They are often purchased unsubsidized (no contract), unlocked and can be moved from carrier to carrier by simply replacing the SIM card. Second of all, there are literally dozens of comparable carriers in each country, which allows for device portability. These two facts put together lead to an extremely competitive marketplace with fantastically low prices. Consumers can see month-to-month (no contract) plans as low as 10 euros/mo., with unlimited plans in the area of 30 euros/mo.! The 2-year contract offerings are in the same price range, and provide completely free top of the line phones for signing a commitment. Carriers are practically fumbling over each other to offer more for less, and give the best deals. When the majority of their consumers could pick up and leave at the end of the month and move to a different carrier, there is extreme incentive to provide the best experience to their users (funny that Europe is showing the USA how markets work).

Now wouldn’t that be nice to have here? Well of course there are several issues with this, many of which cannot even begin to be explained in such a short post (more to follow), but I do not at all believe that the USA couldn’t see the same amazing competition and pro-consumer options available given the proper regulatory and market climates. We know that if there is device portability and there are more carrier choices, consumers will move to the best cost/benefit combination for their case. This inherently will lead to lower prices, better service, and a better wireless industry as a whole.

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