Carriers ponder Apple iPhone subsidy uprising: Will it work?

Carriers ponder Apple iPhone subsidy uprising: Will it work?

Summary: Verizon and AT&T are trying to diversify their smartphone bases so they aren't too dependent on the iPhone. Will smartphone buyers play along?

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Verizon wants a third OS platform badly. So badly that it's open to pushing Windows Phones hard to diversify its handset---and subsidy---base.

The elephant in the post-paid wireless subscriber room: Apple's iPhone. Apple commands hefty subsidies on the iPhone and carriers play along at the expense of margins. But a funny thing happened on the way to iPhone euphoria: Carriers are realizing they can't become too dependent on Apple if they want to grow earnings. The challenge: Despite their best efforts carriers are heavily skewed to Apple's iPhone.

But the data points are adding up that there's a little pushback from carriers. To wit:

  • AT&T has launched Nokia's Lumia 900 with a lot of fanfare. The results in the U.S. have been solid relative to other markets. Why is AT&T on the Windows Phone and Nokia bandwagon? AT&T is known as the iPhone carrier. It would like to broaden its footprint after a belated move to Android devices didn't quite pay off.
  • Verizon got its iPhone once AT&T's exclusive ran out, but pretty much led the Android army as new devices launched. Android also led the 4G LTE charge at Verizon. Today's problem: The company sold 3.2 million iPhones in the first quarter to trump the 2.1 million 4G LTE smartphones sold. That's a big problem for Verizon. Apple's iPhone is low margin and on a 3G network that's less efficient. When the iPhone goes LTE, more lucrative Android handsets may be pushed away. The Apple subsidy is likely to offset any cost savings from moving customers to LTE.

As CNET's Roger Cheng noted, Verizon CFO Fran Shammo placed the company on the Windows Phone bandwagon. Shammo said on Verizon's first quarter conference call:

On the Apple iPhone, we look at every individual handset. We have a broad portfolio. We manage it handset by handset and manage our subsidy. This is just one aspect of our P&L and this is just a nature of this business. I do think though it is important that there is a third ecosystem that is brought into the mix here, and we are fully supportive of that with Microsoft. We created the Android platform from beginning and it is an incredible platform today that we helped to create, and we are looking to do the same thing with a third ecosystem.

Now Verizon isn't exactly hurting. The company reported earnings of $1.69 billion, or 59 cents a share, on revenue of $28.46 billion. Those results topped earnings estimates by a penny. AT&T will also rake in gobs of cash when it delivers its first quarter results.

The wild card in the iPhone subsidy saga may be Sprint. It has bet the ranch on Apple and the iPhone just as other carriers are looking to diversify. Sprint will be quite the business school case study in the years ahead. Sprint's iPhone bet will either pay off big time or kill the company. There's not much in between.

Now the big question here is whether carriers can force new handsets on consumers and enterprises, two user groups betting on the iPhone. Even if carriers diversify and line up a sales army it's unclear that they can slow Apple's momentum.

One thing is certain though: Carriers are going to try to put the iPhone in its place. BTIG analyst Walter Piecyk downgraded shares of Apple last week based on carrier pushback on iPhone subsidies. The downgrade was dismissed for the most part since $1,000 stock price calls are more common, but maybe Piecyk is on to something. If Verizon and AT&T can use their marketing might to push Windows Phone he may have a point.

Topics: Verizon, Apple, Hardware, iPhone, Mobility, Smartphones, AT&T

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32 comments
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  • And how does hitching one's wagon to a

    Mule become a wise decision? WP7 is a mule, not very good at doing pretty much anything. Sure by using some slight of hand tricks, you can make it seem like a good deal. But in the end, when you have to pay people to take your product, it's called dumping. Sure peple like Matt Miller stupm for this loser OS, simply because they're fanboys. But the shear number of Paid Microsoft employees on this site is getting out of control.
    Jumpin Jack Flash
    • WP7 is a gret OS!

      Windows Phone 7 has pretty much caught up with iOS and Android. Windows Phone 8 will bury them!!
      jatbains
      • Caught up in what sense?

        Not in hardware, or for that matter software. Does WP8 come with a shovel? Are you sure you're not davidson in mufti?
        ego.sum.stig
      • Seriously. are you high?

        "Windows Phone 7 has pretty much caught up with iOS and Android."-jatbains

        I don't normally like to be rude or disdainful...but are you kidding me?

        There is absolutely zero evidence to support your statement. You personally may like WP7 and that's great, but WP7 has about 2% market share, it's growth is so low that it's hard to measure, the Lumia - according to Nokia - has had "mixed sales", and Windows 8 won't be out until the Fall.

        Why bother to post if you're just going to make stuff up?
        Falkirk
  • I wonder how some of the Apple people feel about this?

    "Apple commands hefty subsidies on the iPhone and carriers play along at the expense of margins."

    We always hear how stupid it is for companies to sacrifice profit margins for marketshare. Do these same people feel carriers are stupid for sacrificing margins because Apple is forcing those carriers into a race to the bottom? If so, even Apple lovers have to admit that carriers would be better off dumping Apple and going with other handset makers in order to improve their margins.

    Or is Apple simply too strong in this market and carriers have no choice but to carry iPhones or risk going out of business? Sounds like the same fear PC OEMs had with Microsoft. They were forced to sell Windows PCs because if they didn't, they would go out of business.
    toddbottom3
    • Author contradicts himself...

      "...sacrifice profit margins..."

      "...not hurting...gobs of cash..."

      They can well afford the subsidies -- both VZ and ATT gouge consumers. Why is Sprint able to offer such lower rates? They simply chose to not gouge...still profitable, but by not gouging will gain market share.
      Techboy_z
      • Sprint is not profitable

        Sprint is losing money, and they have been for years
        Doctor Demento
    • You've got this upside down

      The carriers are paying high subsidies for the iPhone because it's in such high demand. The carriers that don't carry the iPhone lose customers. Witness the fact that AT&T caught and surpassed Verizon but once Verizon got the iPhone, the trend reversed. Sprint, too, has made it clear that the iPhone has brought in new customers and reduced churn. And the head of T-Mobile has listed their inability to sell the iPhone as one of the primary reasons why their business is suffering.
      Falkirk
  • Chicken or Egg

    While carriers cannot sell iPhones without Apple, neither can Apple sell iPhones without carriers. The market will eventually balance things.
    txscott
    • I don't think so.

      Apple CAN sell iPhones without carriers. Now that they have market share and a solid reputation, if they were to sell unlocked, no contract units that would work on any network, they would sell plenty of them, and probably make a bigger profit. And it would drastically change the wireless market in the U.S. I'm no Apple fanboy, but I can see it happening.
      Seronac
      • No

        Not in the U.S. market with the price Apple would expect to you to pay. The iPhone that AT&T sells for $99 would be atleast $499 from Apple direct, if not more if it was true "world" phone. The iPhone would quickly become a niche product without the support of Verizon, AT&T and Sprint.
        clcrockett
    • Not chicken or egg; supply and demand

      Right now, the carriers need the iPhone more than Apple needs the carrier. Not only does AT&T, Verizon and Sprint sell the iPhone, but four regional carriers recently signed on, as well. And T-Mobile has made it clear that they would sell their soul to get the iPhone.

      Over half the phones that the carriers sell are iPhones. If a carrier refused to sell the iPhone now, it would be economic suicide.
      Falkirk
  • Apple subsidy vs others...

    On another blog, I did a little research on April 3rd in which I calculated the Verizon smartphone subsidy by OS. Here is what I wrote then...

    "There are a total of 31 models of new smartphones offered for sale. If one takes the difference between the retail price and the two year contract price as an indicator of the magnitude of the contract subsidy, heres what you get

    Total phones: 31 average subsidy: $303
    Android phones: 21 average subsidy: $321
    iOS phones: 4 average subsidy: $450
    Blackberry phones: 5 average subsidy: $250
    WP phones: 1 average subsidy: $200

    If those numbers are indicative of the subsidy magnitude, then this is where Apples problem will come from imho. Dan Hesses comments not withstanding, I havent seen any conclusive evidence that indicates iOS users are that much more profitable to the carriers. At some point, the carriers will tire of eating higher subsidies and try to force some of that cost either on to the consumer or back to Apple.

    I think Apple has done a masterful job of playing the carriers against each other and leveraging their strengths. Im questioning how long they can keep it up, and what the effect will be on iPhone sales in the US if the price of the phone on contract goes up by $100 or more."
    printing724
    • Nice Workup

      This cannot go on much longer, something has to give. Raising the cost to the customer wont work - there is already considerable pushback to the $299+ devices. People will generally wait for the "sale" or see something else they like. Apple doesn't do "sales".

      Then look at the devices. If I want a Razr I need to go to Verizon. iPhone? I have three choices. As devices are available across carriers the shift of customers between carriers drops. To make money the carriers need to find something else to leverage - margins. Curious to see how quickly this changes things.

      Advice: watch Sprint. What happens there will slow or speed up the process.
      rhonin
      • Yup

        Good points. Sprint is the first indicator. If their subscriber numbers increase dramatically as a result of the iPhone, that will be one thing. If they don't, that's another. Based on that indicator...

        The next carrier to have negotiations with Apple will be the key. AT&T perhaps? (Reminds me of the UAW negotiations with the Big Three, first one set the pattern for the others)
        printing724
    • Hmmm

      I seem to recall seeing that iPhone customers were more profitable on the contract side of things and were willing to spend more for additional data plans and other carrier add-ons. Perhaps the carriers just wish to eat their cake and still have it left?
      ShockMe
      • Maybe before....

        With the rollout of LTE I think the paradigm shifted.
        On 3G I definitely agree. Not so much now.
        rhonin
      • Evidence, please

        I have read a lot of people saying that but have seen no tangible evidence that it's actually the case. Dan Hesse (Sprint CEO) said that iPhone customers were more profitable but offered no supporting numbers (Like, our ARPU per iPhone user is $x more than Android users, etc..) I'm skeptical of his word since his future (and his company's) is riding on his decision to buy $15.5 billion in iThings over the next several years.

        If you've got hard numbers from somewhere, please post them...
        printing724
      • There was a lot of researches about iPhone's users being more profitable

        @printing724: ... they spend more on data plans, they travel more, they buy more accessories (especially considering how little accessories are available for Android phones comparing to iPhone), and so on.
        DDERSSS
    • The carriers have flat out stated that the iPhone is more profitable...

      "I havent seen any conclusive evidence that indicates iOS users are that much more profitable to the carriers."-

      Both Sprint - which has the iPhone - and T-Mobile - which doesn't have the iPhone - have quite explicitly stated that iPhones are more profitable. The rest of your argument fails because it rests on a false premise.
      Falkirk