Light Reading

Do Big Subsidies Have Big Staying Power?

Dan Jones

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
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.

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

Nice post!

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.


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
SpiderCloud might try for an IPO in 2016. And there may be potential for a buyout too.
Hey there, Philly, NYC & D.C. Guess what? The popemobile could crash your mobile phone service during Francis's visit to the US.
Happn takes location-based dating to a whole new level -- maybe a level too far.
Tech IPOs could suffer if stock market losses prove to be more than just jitters.
Cellphones and rollercoasters don't mix.
From The Founder
The comms industry is rallying to the cause of open, independent interoperability testing.
Flash Poll
Live Streaming Video
CLOUD / MANAGED SERVICES: Prepping Ethernet for the Cloud
Moderator: Ray LeMaistre Panelists: Jeremy Bye, Leonard Sheahan
LRTV Interviews
Top Tips for FTTH Operators

10|8|15   |   02:26   |   (0) comments

At Gigabit Europe 2015, Ventura Team co-founder Richard Jones talks about some of the key business case considerations for FTTH network operators.
LRTV Interviews
M-net Calls for FTTx Unity

10|8|15   |   03:45   |   (0) comments

At the Gigabit Europe event, Jörn Schoof from M-net, the Munich city network operator, calls for industry collaboration on fiber broadband access rollouts.
LRTV Documentaries
The Business Case Challenge for NFV

10|7|15   |   03:47   |   (0) comments

Virtual CPE is one of the early success stories for network functions virtualization, as service providers are finding flexible, programmable CPE solves a lot of logistics problems and reduces their cost. But even here, Masergy Communications faced a business case challenge, says CTO Tim Naramore.
LRTV Interviews
JT Offers Some Gigabit Lessons

10|7|15   |   4:08   |   (1) comment

Barna Kutvolgyi, managing director, Global Consumer, at JT, the incumbent operator on the island of Jersey, talks about how other service providers can learn from his company's gigabit broadband rollout experiences.
LRTV Interviews
AT&T's Chiosi on the Potential of Open Source

10|6|15   |   06:27   |   (0) comments

AT&T Distinguished Network Architect Margaret T. Chiosi talks to Light Reading's Carol Wilson about the potential for open source technology to liberate communications service providers.
LRTV Interviews
Network Security in a Gigabit World

10|6|15   |   05:52   |   (0) comments

Masergy's James Harrison talks about some of the network security and data center issues network operators need to consider as they expand their broadband services portfolios.
LRTV Documentaries
Telefónica: In Search of Virtual Simplicity

10|5|15   |   07:30   |   (0) comments

Francisco-Javier Ramon Salguero, head of Telefónica's NFV initiative, admits virtualization initially means greater complexity, but with the right abstraction layer, it is possible to create a services-driven network architecture. He explains how Telefónica's current trials and initiatives are aimed at doing that, and what his company and other carriers need to ...
LRTV Interviews
Gigabit Europe Takeaways

10|5|15   |   03:47   |   (0) comments

Participants from the inaugural Gigabit Europe event in Munich share their key takeaways from the conference.
Women in Comms Introduction Videos
Intel Urges Women to Take Advantage of Their Seat at the Table

10|5|15   |   4:27   |   (1) comment

Have inclusive and constructive conversations, attach a bigger meaning to your work and get involved in the cause, Intel's Monique Hayward advises women in comms.
LRTV Interviews
BT Updates on Plans

10|2|15   |   03:16   |   (2) comments

Peter Bell, CIO at Openreach, the access network division at UK incumbent BT, provides an update on the operator's trials and how Openreach is planning to deploy the broadband technology in its street cabinets.
Telecom Innovators Video Showcase
Sonus Shakes Up SD-WAN

10|2|15   |   7:22   |   (0) comments

Sonus CTO Kevin Riley sat down with Light Reading to discuss the trajectory of the company, its SDN ambitions and why Sonus is taking a market-disruptive approve to SD-WAN.
LRTV Interviews
CityFibre's Gigabit Vision

10|1|15   |   03:18   |   (1) comment

Mark Collins, director of Strategy & Public Affairs at competitive UK city network operator CityFibre, talks about his company's plans to help build Gigabit Cities.
Upcoming Live Events
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
December 2, 2015, The Westin Times Square, New York City
All Upcoming Live Events
Network appliances have a strong value proposition in today's networks and will continue to do so in the NFV and SDN-enabled networks of tomorrow.
Hot Topics
Eurobites: Dunroamin'
Paul Rainford, Assistant Editor, Europe, 10/2/2015
M&A Speculation Swirls Around Juniper
Ray Le Maistre, Editor-in-chief, 10/6/2015
Cisco's Chambers Rules Out Political Bid
Mitch Wagner, West Coast Bureau Chief, Light Reading, 10/6/2015
Infinera Fleshes Out Its Metro 100G Story
Ray Le Maistre, Editor-in-chief, 10/7/2015
AT&T Gets Green Light for VoWiFi
Brian Santo, Senior editor, Test & Measurement / Components, Light Reading, 10/7/2015
Like Us on Facebook
Twitter Feed
Webinar Archive
BETWEEN THE CEOs - Executive Interviews
With so many new and exciting communications technologies now under development, it's easy to get caught up in the industry's escalating hype cycle. That's why the ...
Last week saw a big day in the 15-year history of Light Reading when Editor-in-Chief Ray Le Maistre and I were invited to interview the Deputy Chairman and Rotating ...
Cats with Phones
"What?! I'm on with Finisar about their stock price tanking" Click Here