Is the iPhone Too Expensive?

Ask anyone in this country what an iPhone costs, and most will say that Apple's (NAS: AAPL) iconic smartphone starts at $199. Models with more storage capacity will set stateside buyers back an additional $100 or $200.

However, this isn't what Apple is making. The world's most valuable tech company rang up an average of $659 per iPhone (including attached services and accessories) during the holiday quarter.

Who pays the lion's share of the difference? Wireless carriers are willing to subsidize more than $300 per phone, knowing that they will more than make that back by locking owners into two-year contracts. It's not pretty. Sprint (NYS: S) , which was the last of the three leading carriers to begin offering the iPhone, isn't expected to turn a profit until 2015.

And it's not just carriers. Retailers are also hurting when consumers choose an iPhone over a higher-margin Android device. RadioShack's (NYS: RSH) gross margins took a beating during the holiday quarter, and the iPhone's availability through all three major carriers at its stores was one of the culprits.

Now let's go overseas. You've seen the long lines and even riots at Apple Store locations in China. However, it's a different story in parts of southern Europe, where carriers can't subsidize smartphones.

The Wall Street Journal wrote yesterday about the iPhone's weak market penetration in certain countries. According to market tracker IDC, just 9% of the smartphones sold in Portugal are iPhones. In Greece the market share drops to a mere 5%.

In the U.S., Android phones don't sell for a lot less than iPhones. If you're willing to rock a 2009 handset, carriers will even give you the iPhone 3GS for free with a two-year wireless contract. However, in countries where handsets aren't subsidized, it's hard to justify a $680 iPhone 4S when a perfectly capable Android phone costs less than $200.

Apple's challenges in Europe aren't new. A study by Kantar Worldpanel ComTech two months ago showed that the iPhone's market share was slipping in Germany, France, Italy, and Spain.

The obvious rebuttal here is Apple's blowout fiscal first quarter. With or without continental Europe, Apple sold a whopping 37 million iPhones this past quarter. However, it does lead one to wonder if Apple's premium pricing is opening too wide a door for Google (NAS: GOOG) and its army of Android developers to exploit the smartphone market as it penetrates the balance of the market.

Apple's stateside response has to keep older models around at lower price points, but given the rapidly evolving marketplace for both iOS and Android, that 2009 gadgetry has never felt so stale.

It's hard to knock Apple and its ability to carve itself the thickest slice of the industry's profits, but Android's European invasion is really just the beginning.

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At the time thisarticle was published The Motley Fool owns shares of Google, RadioShack, and Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple and Google.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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