Light Reading

Do Big Subsidies Have Big Staying Power?

Dan Jones
2/29/2012
50%
50%

10:00 AM -- I wasn't surprised by a The Wall Street Journal report that cheap Android phones easily outsell iPhones in places like Greece, where the carrier subsidies are small or nonexistent.

It's been plain for a couple of years now that inexpensive, open-source Androids are popular in Africa and other places where people simply can't afford an iPhone, subsidy or not. I've written about that for a while; it's part of the reason that companies like Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) have such massive booths here at Mobile World Congress 2012. (See Android's Going Cheap and Huawei, ZTE: Global Devices With Nice Prices.)

This is good news for Google (Nasdaq: GOOG) since it gets its devices in the hands of more people for whom the phone is probably their sole portal for Internet access, hence boosting Google's mobile ad revenue. And, in reality, Apple Inc. (Nasdaq: AAPL) probably doesn't care too much about cheap Androids since it makes hundreds off carrier subsidies and gets to charge for mobile software upgrades and rake in app revenues.

The question for Apple or even high-end Android providers like Samsung Electronics Co. Ltd. (Korea: SEC) is: How much longer can the subsidy model in the U.S. can continue as is?

AT&T Inc. (NYSE: T), Verizon Wireless and Sprint Corp. (NYSE: S) have all justified massive up-front costs for iPhone subsidies because it brings them high-value customers. But those customers have to keep upgrading each year to the new iPhone, or the carriers will just end up stumping up for another two-year contract at the end of their terms. (See VZ iPhone Boosts Data, Shaves Margins in Q4. )

This quarter, AT&T, Verizon and Sprint all took margin hits because of their iPhone subsidies and their shareholders didn't like it. Ma Bell and Big Red can clearly afford to carry on the practice, but can Sprint? (See Sprint's iPhone Q4 Ouch!)

Now that the big three carriers all have the iPhone, the only real metric left to compete on is price. Notice that AT&T has been touting its additional data download speed with the iPhone 4S. Presumably even that minor advantage will disappear when the Long Term Evolution (LTE) iPhone eventually arrives.

So, subsidy pricing becomes the competition ground for the iPhone. That's not a battle that Sprint can win, but by fighting it out, even AT&T and Verizon risk pissing off shareholders with heavier margin hits.

Meanwhile, sub-$200, subsidy-free Androids get faster and more feature-rich every three to six months. They may never be the iPhone, and for many that will be enough to take them out of consideration. (I remember folks at a VC conference last year laughing about how Androids were for poor people, for instance.)

Nonetheless, they may prove to be a more affordable option for both consumers and carriers. As my editor-in-chief, Phil Harvey, is fond of saying: "Why wouldn't you buy one?"

Of course, if the subsidy model does start to break down over time, that also might start to tear at the standard two-year monthly contract in the U.S. But that's another kettle of chips for another time.

— Dan Jones, Site Editor, Light Reading Mobile

(4)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
jepovic
50%
50%
jepovic,
User Rank: Light Beer
12/5/2012 | 5:41:04 PM
re: Do Big Subsidies Have Big Staying Power?


Haven't we seen exactly the same behavior during the first years of DSL, digital cellular and 3G? There is a new market which means customers become much more mobile (pardon the pun). After a couple of years (ie now?), the market matures and the focus of the game changes from market share-grabbing to margins.


This will of course hit Apple, since it will be difficult to keep the high prices. iPhone has a great brand name, but so did Nokia (and before them Ericsson and Motorola). Brand value is far from permanent these days. A recent poll among young people here in Sweden found that they think Apple is "for old people" (ie 30+, still a sizable nieche market ;-) ) . Apple will have to keep innovating to maintain the historically incredible margins they enjoy right now. If history is any guide, it will be extremely difficult for them.


In fact, the advent of an open OS is in itself a sign that the cell phone market is maturing, just like PCs 25 years ago.

joset01
50%
50%
joset01,
User Rank: Light Beer
12/5/2012 | 5:41:03 PM
re: Do Big Subsidies Have Big Staying Power?


Nice post!

alandal
50%
50%
alandal,
User Rank: Light Beer
12/5/2012 | 5:41:01 PM
re: Do Big Subsidies Have Big Staying Power?


Nice post indeed. You just pointed out a trend many people tend to forget. Your DSL case provides a good example. Remember a few years back, people were devising different modulation schemes trying to squeeze a few bits through a twisted pair. Back then a carrier could sign a few more customers if their line ran slightly faster. Now that entire market is commoditized.  


Back to now, iPhone can help carriers grab more new users, as it did for AT&T and VzW. But that trend is going down. Look at what iPhone did for Sprint. Apple someday has to give up some of their burdensome charges on carriers in order to main the volume to keep their internal costs down, or they have to give up their profit.   

Look at all major smartphone platforms, Apple, Google and MS (AGM), all are going after long term profitability, which is to sell more services and also goes again carrier’s will. Once the HW is commoditized,  which could happen in 2 years?, the battle is really between carriers and AGM alike.


 

Flook
50%
50%
Flook,
User Rank: Light Beer
12/5/2012 | 5:40:57 PM
re: Do Big Subsidies Have Big Staying Power?


Just wondering if anyone has done or knows of a survey on why subscribers choose to go with a mobile phone from a particular vendor? I suspect that, like any other purchase, a number of considerations go into the selection process--price, style, features, service plan, etc. Apple bigots will spring for an iPhone, but I would not be surprised if for most people the service plans offered by the operator is a top consideration.

More Blogs from Jonestown
One from our WTF department! Marshall -- the amp maker -- intros an Android smartphone.
Consumers have no way of knowing if the aftermarket Sprint phone they're buying will work on the operator's network -- and that's burning Sprint's MVNOs.
Verizon's AOL buy is its latest push in an ongoing strategy to deliver more mobile video to its customers.
Cisco CEO predicts the digitization of everything will change, like, everything!
The connected car is driving the IoT market now, but that's just the start of it.
Flash Poll
From The Founder
Anshul Sadana answers questions from Steve Saunders, Light Reading's founder and CEO, about Arista's CloudVision, a global cloud network controller for workload orchestration and workflow automation delivering a turnkey solution for cloud networking.
Live Streaming Video
CLOUD / MANAGED SERVICES: Prepping Ethernet for the Cloud
Moderator: Ray LeMaistre Panelists: Jeremy Bye, Leonard Sheahan
LRTV Custom TV
End-User or Enterprise Benefits to the New IP

7|30|15   |   04:27   |   (1) comment


Andrew Coward discusses what the New IP means to end users or enterprise customers. He explains compelling reasons, including how every customer can get their own network, from the transformation to the New IP.
LRTV Custom TV
Network Visibility & the New IP

7|30|15   |   02:23   |   (0) comments


Mukund Srigopal provides an explanation of what network visibility is and how it is essential as service providers transition to the New IP. In addition, the importance of the network packet broker is discussed.
Between the CEOs
Video Exclusive With Basil Alwan, Alcatel-Lucent

7|24|15   |   26:44   |   (5) comments


Basil Alwan, President of IP Routing & Transport at Alcatel-Lucent, discusses virtualization, cultural challenges, the capex crunch and more with Light Reading founder and CEO Steve Saunders.
LRTV Custom TV
VDF: Enable the Financial With Mobile Money

7|20|15   |   06:53   |   (0) comments


Ian Ravenscroft discusses how operators can expand to occupy the entire digital services value chain through service innovation.
LRTV Custom TV
Telefónica on OSS Transformation

7|20|15   |   06:01   |   (0) comments


Jose Gonzales discusses the details of Telefónica's operation transformation program.
LRTV Custom TV
Judi Achmadi on Huawei's Cloud Storage Solution

7|20|15   |   03:33   |   (0) comments


Judi discusses the key business goals of TelekomSigma's public cloud service and how Huawei's solution helps them address challenges.
LRTV Custom TV
KPN Enlightening Digital Business & IT Transformation

7|20|15   |   06:19   |   (0) comments


Rob de Beer discusses the changes that operators need to make with service innovation now coming from the Internet world.
LRTV Custom TV
Stratus Telco-Grade Cloud Solutions & NFV

7|20|15   |   07:34   |   (0) comments


Ali Kafel from Stratus Technologies addresses high-availability concerns within the telco industry with a solution that enables telcos to provide high-availability and stateful fault-tolerance using a software-based approach.
LRTV Documentaries
The Six Million Dollar Business Man

7|20|15   |   01:52   |   (0) comments


Steve Saunders, publisher. A man barely alive after an acquisition malfunction imploded the company he founded. Gentlemen, we can rebuild Light Reading. Better, faster, stronger.
Between the CEOs
CEO Chat With Anukool Lakhina, Guavus

7|20|15   |   38:51   |   (1) comment


Guavus CEO Anukool Lakhina talks to Light Reading founder and CEO Steve Saunders about the role of operational analytics in the communications services and networking sectors, particularly in relation to IoT.
LRTV Custom TV
IBM's Flash Storage With Intel QuickAssist

7|20|15   |   03:18   |   (0) comments


Intel's Bev Crair and IBM's Eric Herzog discuss how IBM's V9000 Flash Storage System has helped customers around the world. Featuring real-time compression powered by Intel QuickAssist Technology, the V9000 is a next-gen flash storage solution.
LRTV Huawei Video Resource Center
Thailand's AIS: Transforming to an FMC Operator

7|17|15   |   4:53   |   (0) comments


Saran Phaloprakarn, Senior VP of Fixed Broadband Business Management of Thailand's AIS, was a keynote speaker at the first Asia-Pacific Ultra Broadband Summit in Bangkok. In this video, he talks to Heavy Reading about transforming into an FMC (FBB+MBB+Content) operator.
Upcoming Live Events
September 16-17, 2015, The Westin Galleria Dallas, Dallas, TX
September 16, 2015, The Westin Galleria Dallas, Dallas, TX
September 16, 2015, The Westin Galleria Dallas, Dallas, TX
September 29-30, 2015, The Westin Grand Müchen, Munich, Germany
October 14-15, 2015, New Orleans Ernest N. Morial Convention Center, New Orleans, LA
November 5, 2015, Hilton Santa Clara, Santa Clara, CA
November 17, 2015, Santa Clara, California
December 1, 2015, The Westin Times Square, New York City
All Upcoming Live Events
Infographics
Network operators start seeing savings from NFV in the first year, according to a study by Affirmed Networks and ACG.
Hot Topics
Robbins Succeeds Chambers as Cisco Changes CEOs
Mitch Wagner, West Coast Bureau Chief, Light Reading, 7/27/2015
Cable Feuds With Senate Dems Over STBs
Alan Breznick, Cable/Video Practice Leader, 7/31/2015
RJio to Launch Its Own 4G Devices Brand
Gagandeep Kaur, Contributing Editor, 7/27/2015
Easing the Tech Pains for the Homeless
Carol Wilson, Editor-at-large, 7/28/2015
Like Us on Facebook
Twitter Feed
September 22, 2015
Media Begins With “Me”
Webinar Archive
BETWEEN THE CEOs - Executive Interviews
Basil Alwan, President of IP Routing & Transport at Alcatel-Lucent, discusses virtualization, cultural challenges, the capex crunch and more with Light Reading founder and CEO Steve Saunders.
Guavus CEO Anukool Lakhina talks to Light Reading founder and CEO Steve Saunders about the role of operational analytics in the communications services and networking sectors, particularly in relation to IoT.
Cats with Phones
Comes With Free Phone Stand Click Here
Who says cats don't have any skills?