A few weeks ago, a research analyst claimed that Apple's iPhone sales were on a downward trajectory because carriers were growing weary of the high subsidies they pay Apple for the iPhone. The reality, though, is that carriers love the iPhone. What's more, many carriers need the iPhone (ahem, Sprint)
A few weeks ago, a research analyst claimed that Apple’s iPhone sales were on a downward trajectory because carriers were growing weary of the high subsidies they pay Apple for the iPhone. Consequently, the analyst articulated that carriers were soon going to put an end to early upgrade plans which allow iPhone users to break out of their 2-year contracts early if they purchase a new device and sign up for a new contract.
Operators, unwilling to stall the pace of ARPU growth, offered generous upgrade policies including some that enabled a fully subsidized phone upgrade only one year in to a two year contract. We expect those policies to change as the faster upgrade rate of smartphones compared to legacy feature phones has been a costly surprise to post-paid and pre-paid operators, alike.
But as I pointed out in an earlier post, the vast majority of carriers have rarely offered early upgrade plans. Indeed, the biggest example was when AT&T, ahead of the Verizon iPhone launch, offered existing iPhone 3GS users the opportunity to upgrade to the iPhone 4 at subsidized prices even if they remained under their original 2-year contract.
Comically, and arguably pathetically, this “prediction” was taken as fact by other analysts and it wasn’t long before many media outlets and pundits began sounding the iPhone death knell. After all, it does make for an eye-catching headline – “Carriers sick of Apple’s high prices; Apple iPhone sales poised to drop!”
The reality, though, is that carriers love the iPhone. What’s more, many carriers need the iPhone (ahem, Sprint).
During Apple’s earnings conference call two weeks ago, the question of carrier subsidies was brought to the forefront when an analyst on the call expressed concern over the aforementioned report.
Specifically, Apple CEO Tim Cook was asked to comment on the report that carriers will attempt to stretch out the upgrade cycle to the full two years in an effort to reduce subsidies.
Cook responded in part:
The most important thing is for Apple to keep making products that customers want. We are deeply committed to doing this. We are innovating at a rate that’s unbelievable. From the carrier, the subsidy isn’t large relative to the sum of monthly payments across a 24 month contract. Any delta between the iPhone and another phone is even smaller. iPhone has a distinct advantage to the carrier over other phones. The churn from iPhone customers is lowest of any phone they sell. That has a significant financial benefit to the carrier.
Our engineering teams work extremely hard to be efficient with data, differently from some others. iPhone has far better data efficiency, vs other smartphones which are using an app-rich ecosystem. Most important, iPhone is the best smartphone on the planet to entice a customer who is currently using a traditional phone to upgrade to a smartphone. This is by far the largest opportunity for Apple and our carrier partners and a great experience for customers. It’s a win-win-win. All of these factors are missed in this discussion of subsidy.
Again, carriers want the iPhone because it ultimately earns them a higher return on investment than other devices, even if the face of higher subsidies.
Sprint CEO Dan Hesse explained as much a few weeks ago:
Subsidises are heavy for the iPhone. This is the reason why a high percentage of new customers is important. But iPhone customers have a lower level of churn and they actually use less data on average than a high-end 4G Android device. So from a cost point of view and a customer lifetime value perspective, they’re more profitable than the average smartphone customer…
So if you’re a carrier, an iPhone user is less likely to jump ship to another carrier. And in the carrier business, keeping current customers is just as important as attracting new ones.
So while the iPhone is admittedly less margin friendly to carriers up front, it’s more likely to create a long term customer than any other competing device out there. It’s a short term hit for a long term gain. And as Cook explained, it takes carriers just a few months to earn back the subsidies they pay to Apple for the iPhone.
And speaking to Cook’s point about using data efficiency, Hesse explained:
One of the beauties of carrying the iPhone is it extends the period of time and increases the likelihood of us maintaining unlimited data longer because it uses our network so efficiently,
The iPhone is the only device that looms larger than the carriers themselves.Indeed, T-Mobile has been quite open about how subscribers are leaving in droves because they don’t offer the iPhone. In the recent December quarter, T-Mobile lost over 800,000 subscribers. A press release at the time placed the blame squarely on the iPhone.
For T-Mobile USA, the past year was characterized by significant challenges, particularly in the fourth quarter, following the market launch of the new Apple iPhone model by the three major national competitors in October… However, not carrying the iPhone led to a significant increase in contract deactivations in the fourth quarter of 2011…
Sequentially, the decline in branded net contract customers was driven primarily by higher branded contract deactivations as a result of the launch of the iPhone 4S by three nationwide competitors in mid-October.
Point blank, the iPhone sells.
When Sprint began offering the iPhone this past October, the iPhone 4S, in just 12 hours, became the fastest selling device in Sprint history. When Verizon announced their Q1 2012 earnings a few weeks back, iPhone sales accounted for more than 50% of all their smartphone sales. And when AT&T released their earnings, they indicated that the iPhone accounted for approximately 75% of total smartphone sales and an impressive 60% of all total phone sales.
Carriers aren’t going to stop paying high iPhone subsidies. On the contrary, carriers are willing, and will continue, to pay a higher subsidy for the iPhone as long as consumers continue to snatch them up as fast as Apple can make them. And as the most popular smartphone both AT&T and Verizon carry, it’s a deal the carriers are keen to keep up.
Business is business. If carriers weren’t seeing a net benefit to carrying the iPhone at current subsidized pricing the economics of supply and demand would push those subsidized prices lower.
Transcript via MacRumors
