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The iPhone Is a Nightmare For Carriers

Posted by Unknown on from the greed-begets-greed dept.

New submitter HungryMonkey writes "According to the latest EBITDA numbers from AT&T, Sprint, and Verizon, the subsidies they have to pay Apple in order to carry the iPhone are drastically reducing their profits. From the Article: '"A logical conclusion is that the iPhone is not good for wireless carriers," says Mike McCormack, an analyst at Nomura Securities. "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."' So one money sucking leech has attached itself to another money sucking leech?"

12 of 438 comments (clear)

  1. Perspective by Effugas · · Score: 5, Insightful

    http://arstechnica.com/apple/news/2012/01/82-percent-of-atts-q4-2011-sales-are-smartphones-66-percent-are-iphones.ars

    Yeah. 66% of AT&T's 4th quarter sales were iPhones. I was on Verizon for years, switched to AT&T only for their iPhone, and stuck with them only for their GSM capabilities worldwide. Sure, your margins are less when you offer a better service. Would you prefer no sales though?

    1. Re:Perspective by Aerorae · · Score: 5, Insightful

      Would having wireless carriers be dumb pipes really be so bad? Regardless of who's "goodness permeates"?

    2. Re:Perspective by Shakrai · · Score: 5, Insightful

      Would having wireless carriers be dumb pipes really be so bad?

      Minor nitpick: If they were "dumb pipes" they wouldn't have to subsidize the cost of the iPhone. You'd pay full price for it and obtain service without a contract.

      --
      I want peace on earth and goodwill toward man.
      We are the United States Government! We don't do that sort of thing.
    3. Re:Perspective by wed128 · · Score: 5, Insightful

      Deal. I've wanted this for years.

    4. Re:Perspective by Tharsman · · Score: 5, Insightful

      Would having wireless carriers be dumb pipes really be so bad? Regardless of who's "goodness permeates"?

      For us? No.
      For them? Yes.

      I really think they will die if they have to become dumb pipes.

      They are running an insanely high profit margin scheme right now. The dumb pipe business is very low profit, relatively speaking. A company can certainly live off doing this, but not a company that is setup to depend on such a high profit scheme.

      Call it the Kodak scenario. Kodak is not dying because of relevance, or refusal to adapt. They are dying because their entire structure was setup around extreme profit margins and it is nearly impossible to scale back without dying. Keep in mind scaling back usually means selling factories and real estate (if you find someone to buy them) and firing insane number of employees, all while restructuring your workflow to manage everything with drastically less manpower.

      The same will happen to carriers once they are forced into becoming wireless ISPs. They will start struggling to survive, and new companies built from the ground up with a more streamlined structure will become the dominant dogs.

    5. Re:Perspective by Anonymous Coward · · Score: 5, Informative

      T-mobile USA? Ever heard of them? They've offered non-contract monthly plans (with data, same options for the same price as the contract plans, but one payment up-front and no ETF if/when you leave) since forever, and they recently (a year or two back) added contract plans that are cheaper if you bring your own phone.

      As a bonus, since T-mobile uses SIMs and aren't evil (or at least aren't the class of evil one expects from US mobile providers), if you got on a cheap ($35/mo, a few hundred minutes + unlimited data) monthly plan plan that was offered only for non-smartphones to tether your N800, you can swap the sim to your N900 when you upgrade, then cut it down and swap it to your N9, still pay the same -- I speak from experience.

      On the conventional refill-type prepay, I think T-mobile does have some data options for those (not sure) but I know some of the MVNOs have prepaid data options.

    6. Re:Perspective by The+Mister+Purple · · Score: 5, Insightful

      Speaking of Apple avoiding non-Apple bloatware, I often smile when I imagine the wailing and tooth-gnashing at the wireless carriers that must have followed negotiations with Apple.

      --
      "For a successful technology, reality must take precedence over public relations, for nature cannot be fooled." Feynman
    7. Re:Perspective by Tyler+Eaves · · Score: 5, Interesting

      Because the carriers are forced to actually compete on price, since people can switch carriers at the drop of a hat. NO LONG TERM CONTRACTS.

      Plus carriers only have to cover actual operating expenses, not making back the $500 or so that they "lost" from a heavily subsidized phone.

      To give an actual example, a sample plan picked more or less at random, in the UK (Virgin Mobile)

      600 minutes, 2500 texts, 2.5GB of data. 21GBP = ~$33.

      A similar (but inferior plan) from Verizon in the US
      450 minutes = $39.99. Add another $10 for 1000 texts (or $20 for unlimited), and another $30 for 2GB of Data.
      Oh, and your're locked in for 2 years.

      --
      TODO: Something witty here...
    8. Re:Perspective by drakaan · · Score: 5, Interesting

      Actually, it sounds like it's even worse than that.

      ...Nomura's McCormack said carriers feel the need to have the iPhone to maintain their market share. But to make money on the devices, he thinks they will have to raise rates or get tough with Apple on reducing the subsidy...

      OK. Charge people more for iPhones or get tough with Apple, got it.

      ...The latter is practically impossible. 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...

      ...Wait, what? Yes. Carriers have been hiking prices, but across the board. So now I'm subsidizing the people who want iPhones because the carriers want iPhone users? And iPhone users increase market share but not profit? Am I in bizzaro-world?

      The situation here seems to be that not carrying the iPhone is profitable, since the subsidy cost is so high, but carriers *feel* like they need to carry it because otherwise people who won't end up making them profit will complain and not sign money-losing contracts that cause price hikes for non-apple customers that *do* make them money.

      WTF???

      --
      "Murphy was an optimist" - O'Toole's commentary on Murphy's Law
  2. Then why... by TrailerTrash · · Score: 5, Insightful

    Don't carriers drop Apple? "We'll lose money on every transaction but make it up in volume" has nevevr worked.

    Or, is it that profits are reduced, not eliminated? Value destruction means losing money, not reduced margins. Pretty important to distinguish. If they were losing huge buckets of money, we wouldn't see carriers clamoring to carry the devices. OTOH, selling at reduced margins at high volume can potentially be profit maximizing (e.g., Wal*Mart).

  3. Poor babies. by Picass0 · · Score: 5, Insightful

    Apple drug these backward-ass bozos kicking and screaming into the modern phone era, so cry my a river.

    When I think of the punitive overage changes these carriers have for data, roaming, SMS texting... It warms my heart to think of their financial discomfort.

    For what we pay for cell service in the US we should have a state of the art infrastructure and widespread 4G access.

  4. Drastically reduced profits? by tomhath · · Score: 5, Insightful

    Between 2009 and 2010, Verizon (VZ, Fortune 500) averaged EBITDA service margin of 46.4% per quarter. In the first quarter that the iPhone went on sale, that fell to 43.7%. Last quarter, when Verizon sold a record 4.2 million iPhones, its margin plunged to 42.2%.

    Gee, margin "plunged" from 46.4% to 42.2%. It sounds like their profits have dropped from really, really obscene to just really, really obscene. I need to get out my tiny violin and start playing it for them.