Article: Not Good for Carriers?!

by on February 8, 2012

With Apple’s blowout quarter, some have been curious what this means for the carriers. The iPhone’s simple lineup has been beating the combined offerings of everyone else in profitability, but does the required extra $20-$30/month data plan help offset the subsidy? Not so, according to a report from David Goldman of CNNMoney (via BGR).

What strikes me as odd is that somehow, with carriers arguably overcharging for things like text messages, more minutes than you’d know what to do with, and limited data plans, we’re supposed to feel bad for them, as Mike McCormack, an analyst at Nomura Securities states:

“A logical conclusion is that the iPhone is not good for wireless carriers…When we look at the direct and indirect economics that Apple has managed to extract from the carriers, the carrier-level value destruction is quite evident.”

McCormack isn’t the only one:

Other analysts agree. Kevin Smithen of Macquarie Securities said that he expects iPhone sales to continue to grow beyond Wall Street’s expectations this year.

“We think the subsidies from these sales will continue to impede margins,” Smithen said, who expects AT&T’s EBITDA service margins to fall for the fourth straight year.

While I get that an iPhone, in general, is costing carriers more than your run-of-the-mill basic flip-phone, a number of these costs are passed on to the consumer. Throughout much of the article, it seems Goldman is painting a picture that the iPhone is the sole reason for thinning profit margins among carriers, but it’s actually all smartphones and other costs, such as 4G networks that seem to be a big item in the carriers’ arms race (which the iPhone currently doesn’t even work with):

Apple isn’t the only factor, of course. Carriers are also raising their rates to offset the cost of expanding their network capacity and upgrading to more efficient 4G technologies. But that, too, is tied up with the iPhone boom: Smartphones are data hogs, and they’re one of the prime reasons carriers need to sink billions into improving their infrastructure.

As for the iPhone and other smartphone costs?

All smartphones weigh on carriers’ margins, since wireless carriers pay a hefty subsidy up front to buy the phones from the handset manufacturers. They make up the difference over the life of a two-year contract.
But the subsidies on the iPhone — roughly $450 per device — are the highest in the industry. AT&T’s subsidies are even more exacerbated because it gives away the iPhone 3GS for free.

Well, if this is such a problem, couldn’t AT&T stop the 1¢ Android phone sales and also stop offering the 3GS? Not only is it an almost three-year-old product, but no other American carrier offers it. Oh wait…they’re still “selling” quite well. Let’s look at the numbers of unsubsidized iPhones, sold as “unlocked and contract-free” from Apple, shall we?

For the sake of argument, we’ll use AT&T. Without any sort of discounts that Apple may give to AT&T for purchasing in large quantities, the iPhone 3GS costs then $375, the 4 and 4S cost them $450, as Goldman noted). That hardly sounds like the 3GS is hurting their bottom line the most. It still locks customers into a two-year contract with a data plan, arguably keeps them coming back for more when it’s upgrade time, and costs AT&T less than a customer getting a 4 or 4S.

For a comparison on the non-Apple side of things, the Samsung Galaxy S II and BlackBerry Bold 9900 retail for about $600 unlocked and off-contract, and AT&T is selling them for $149 and $199, respectively. That hits fairly close to the subsidy of the iPhone. Unfortunately, Samsung, RIM, HTC, and others don’t directly sell unlocked models, or have different prices, depending on where you buy them.

The margins may be slimmer than before, but the carriers are still making money. The only difference is that the model has changed from the days of cheap (at least for the carriers to buy) subsidized phones and then pure-profit add-ons, like text messaging. Now, consumers are expecting more in the form of handsets and what you can do with them. Unfortunately, Goldman makes a very truthful point:

So carriers have been gradually hiking prices. Over the past year, Sprint increased its smartphone rates by $10 a month, Verizon ended its unlimited data offering and New Every Two deal, and AT&T ended its unlimited plan and raised its prices by $5 a month.

Maybe we should start arguing the iPhone is bad for consumers by way of carriers?

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