Apple has negotiated generous subsidies from mobile carriers to sell iPhones at lower upfront prices, but Google and its Android licensees haven't, leaving carriers such as Verizon to drive up the price of higher end Android phones to make up the difference.
The result is a price disparity that favors the various iPhone models by $100 to $200 over Android devices with a similar hardware cost. That's helping Apple keep its margins up even in a market glutted with competition from scores of Android models from various makers.
It also leaves carriers and other hardware makers fighting over the scraps of profit left, as most Android buyers aim toward cheap, low end models. Carriers like Verizon know that buyers interested in high end Android phones will pay virtually anything, so they're marking those models up to be half again as much as Apple's new iPhone 4S.
Android costs more, not less
When Google first began touting Android as an open source platform, pundits predicted that the wide variety of Android licensees would offer cheaper phones with differentiated, innovative features that Apple simply couldn't compete with. Instead, Apple has consistently offered more attractive hardware at the same or lower prices, in part by negotiating higher subsidies in exchange for access to the iPhone.
For years, Apple has set a standard entry price of its newest smartphones at $199, with higher end models available with more storage. This year however, Verizon has set a new contract price for its high end Android phones at $299.
Both the Motorola Droid RAZR and the just released Google-branded Samsung Galaxy Nexus are $299 with a two year Verizon contract, and both are listed as costing $649 without a contract. In contrast, Apple's 16GB iPhone 4S is offered for only $199, even though it costs the same $649 without a contact. Apple is getting a $450 subsidy, compared to just $350 for Android licensees Motorola and Samsung.
Apple's $450 subsidy remains the same across the iPhone 4S range of 32 and 64GB models. The 8GB, $99 Verizon iPhone 4 has a full retail price of $549, also giving it the same $450 subsidy.
This has the effect of making the base model iPhones appear cheaper, and the higher end iPhones with increased storage appear to be about the same price as the base model, high end Android offerings.