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
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.
It's the Claure and Legere show! Sprint and T-Mobile CEOs trade barbs -- or at least retweets -- over rival Super Bowl ads.
Google is now backing or actively exploring three ways of delivering cheaper Internet connectivity to the world: satellites, drones and balloons.
Flash Poll
From The Founder
Last week I dropped in on "Hotlanta," Georgia to moderate Light Reading's inaugural DroneComm conference – a unique colloquium investigating the potential for drone communications to disrupt the world's telecom ecosystem. As you will see, it was a day of exploration and epiphany...
LRTV Documentaries
Cable Eyeing SDN for Headend, Home Uses

5|26|15   |   05:57   |   (1) comment


CableLabs is looking at virtualizing CMTS and CCAP devices in the headend, as well as in-home devices, says CableLabs' Karthik Sundaresan.
LRTV Documentaries
Verizon's Emmons: SDN Key to Cost-Effective Scaling

5|22|15   |   03:53   |   (0) comments


For Verizon and other network operators to ramp up available bandwidth cost effectively, they need to move to SDN and agree on how to do that.
LRTV Documentaries
Lack of Universal SDN a Challenge

5|21|15   |   04:51   |   (3) comments


Heavy Reading Analyst Sterling Perrin talks about how uncertainty about SDN standards and approaches may be slowing deployment.
LRTV Custom TV
Steve Vogelsang Interview: Carrier SDN

5|20|15   |   05:02   |   (0) comments


Sterling Perrin speaks to Steve Vogelsang, Alcatel-Lucent CTO for IP Routing & Transport business, about the new Carrier SDN-enabling Network Services Platform and the operator challenges it solves.
LRTV Custom TV
Carrier SDN: On-Demand Networks for an On-Demand World

5|20|15   |   20:52   |   (0) comments


Steve Vogelsang, Alcatel-Lucent CTO for IP Routing & Transport business, talks about requirements and benefits of Carrier SDN during the keynote address at the Light Reading Carrier SDN event May 2015.
LRTV Documentaries
The Security Challenge of SDN

5|19|15   |   02:52   |   (0) comments


CenturyLink VP James Feger discusses concerns that virtualization could create new vulnerabilities unless network operators build in safeguards.
LRTV Custom TV
NFV Elasticity – Highly Available VNF Scale-Out Architectures for the Mobile Edge

5|18|15   |   5:50   |   (0) comments


Peter Marek and Paul Stevens from Advantech Networks and Communications Group talk about their NFV Elasticity initiative and the company's latest platforms for deploying virtual network functions at the edge of the network. Packetarium XL and the new Versatile Server Module: 'designed to reach parts of the network that other servers cannot reach.'
LRTV Huawei Video Resource Center
Bay Area Spark Meetup 2015

5|14|15   |   3:54   |   (0) comments


Developed in 2009, Apache Spark is a powerful open source processing engine built around speed, ease of use and sophisticated analytics. This spring, Huawei hosted a meetup for Spark developers and data scientists in Santa Clara, California. Light Reading spoke with organizers and attendees about Huawei's code contributions and long-term commitment to Spark.
LRTV Custom TV
The Transport SDN Buzz

5|12|15   |   06:01   |   (1) comment


Sterling Perrin, senior analyst at Heavy Reading, speaks with Peter Ashwood-Smith of Huawei and Guru Parulkar of ON.Lab about the evolution of transport SDN and the integration of technologies.
LRTV Custom TV
Next-Generation CCAP: Cisco cBR-8 Evolved CCAP

5|5|15   |   04:49   |   (0) comments


John Chapman, Cisco's CTO of Cable Access Business Unit and Cisco Fellow, explained the innovation design of Cisco's cBR-8, the industry's first Evolved CCAP, including DOCSIS 3.1 design from ground-up, distributed CCAP with Remote PHY and path to virtualization. Cisco's cBR-8 Evolved CCAP is the platform that will last through the transitions.
LRTV Custom TV
Meeting the Demands of Bandwidth & Service Group Growth

5|1|15   |   5:35   |   (0) comments


Jorge Salinger, Comcast's Vice President of Access Architecture, explains how DOCSIS 3.1 and multi-service CCAP can meet the demands of the bandwidth and service group growth.
LRTV Custom TV
DOCSIS 3.1: Transforming Cable From Hardware-Defined Network to Software-Defined Network

4|29|15   |   03:48   |   (0) comments


John Chapman, Cisco's CTO of Cable Access Business Unit and Cisco Fellow, explains how DOCSIS 3.1 can transform cable HFC network to a more agile software-defined network.
Upcoming Live Events
June 8, 2015, Chicago, IL
June 9, 2015, Chicago, IL
June 9-10, 2015, Chicago, IL
June 10, 2015, Chicago, IL
September 29-30, 2015, The Westin Grand Müchen, Munich, Germany
October 6, 2015, The Westin Peachtree Plaza, Atlanta, GA
October 6, 2015, Westin Peachtree Plaza, Atlanta, GA
All Upcoming Live Events
Infographics
Procera has gathered facts, stats and customer experience feedback from a survey of 540 users from across the globe.
Hot Topics
10 Alternate Uses for Tablets
Eryn Leavens, Copy Desk Editor, 5/22/2015
Bidding War for TWC Looks Likelier
Alan Breznick, Cable/Video Practice Leader, 5/22/2015
Eurobites: Alcatel-Lucent Trials 400G in Czech Republic
Paul Rainford, Assistant Editor, Europe, 5/26/2015
Comcast Targets 6 New Gigabit Markets
Mari Silbey, Senior Editor, Cable/Video, 5/21/2015
Potholes Lurk in Indian Smart City Project
Gagandeep Kaur, Contributing Editor, 5/22/2015
Like Us on Facebook
Twitter Feed
BETWEEN THE CEOs - Executive Interviews
On May 29th 10 AM ET, Steve Saunders, founder and CEO of Light Reading, will be drilling into the "pains and gains" of NFV with Saar Gillai, SVP & GM for NFV at Hewlett-Packard Co. (NYSE: HPQ) (HP). He has defined a four-step NFV model describing a sequence of technology innovation. It's a must-read doc for any network architect looking to get to grips with their NFV migration strategy. Join us for the interview, and the chance to ask Saar your NFV questions directly!
With 200 customers in 60 countries, Stockholm-based Net Insight has carved out a solid leadership position in one of the hottest vertical markets going in comms right now: helping service providers and broadcasters deliver video and other multimedia traffic over IP networks. How has Net Insight managed to achieve this success in the face of immense competition from the industry giants?
My ongoing interview tour of the leading minds of the telecom industry recently took me to Richardson, Texas, where I met with Rod Naphan, CTO and SVP, Solutions, ...
Cats with Phones
Too Fluffy to Talk Click Here
Elmer found that his bountiful fur got in the way of meaningful conversation.