& cplSiteName &

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
The phablet is not so phab anymore. UPDATED 10/12 4:42PM
Randall Stephenson and John Legere weigh in on the Black Lives Matter movement, with AT&T executive telling employees he wants a company conversation, starting with him.
Software-defined radio access networks are coming up on the virtualization menu at some point in the near future.
The idea is simple: a version of LTE that doesn't use much power for IoT applications. But naming it is hard – rilly, rilly hard!
LinkNYC shuts down web access on the street kioks because some people were hogging them and using them 'inappropriately.' Who could've guessed that would happen?
Light Reading’s Upskill U is a FREE, interactive, online educational resource that delivers must-have education on themes that relate to the overall business transformation taking place in the communications industry.
Wednesday, October 26, 1:00PM EDT
Security: Tackling DDoS
Gary Sockrider, Principal Security Technologist, Arbor Networks
Friday, October 28, 1:00PM EDT
Security: The Plusses and Minuses of Open Source Software
Nick Feamster, Acting Director, Center for Information Technology Policy, Princeton University
Wednesday, November 16, 1:00PM EST
SDN 101
John Isch, Practice Director, Network & Voice, Orange Business Services
Friday, November 18, 1:00PM EST
SDN & Open Source
Christopher W. Rice, Senior Vice President of AT&T Labs, Domain 2.0 Architecture and Design
in association with:
From The Founder
Light Reading today starts a new voyage as part of a larger Enterprise.
Flash Poll
Live Streaming Video
Charting the CSP's Future
Six different communications service providers join to debate their visions of the future CSP, following a landmark presentation from AT&T on its massive virtualization efforts and a look back on where the telecom industry has been and where it's going from two industry veterans.
LRTV Custom TV
Next-Generation Technology Beyond DOCSIS 3.1

10|20|16   |     |   (0) comments

At SCTE 2016, Huawei's Liu Jianhua speaks with Alan Breznick for an exclusive interview.
LRTV Custom TV
Hybrid Video Solutions to Change TV, Change Future

10|20|16   |     |   (0) comments

At SCTE 2016, Huawei's Ian Locke speaks with Alan Breznick for an exclusive interview.
LRTV Custom TV
Huawei Future-Oriented Giga Coax Network

10|20|16   |     |   (0) comments

At SCTE 2016, Huawei's Allen Wang speaks with Alan Breznick for an exclusive interview.
LRTV Custom TV
Huawei at SCTE 2016

10|20|16   |     |   (0) comments

Join Alan Breznick of Light Reading and take a sneak peek at the Huawei booth at SCTE 2016.
LRTV Custom TV
Assuring Network Quality in a Rapidly Changing Environment

10|20|16   |     |   (0) comments

As the rate of change and complexity increases in agile networks, the importance of introducing DevOps methodologies for integrating active test and assurance solutions throughout the full service lifecycle becomes critical to ensure that customers are experiencing the service quality they demand. The industry landscape is changing, and software-based test and ...
Telecom Innovators Video Showcase
A10 Networks on Service Providers' Industry Needs

10|20|16   |     |   (0) comments

Light Reading's Steve Saunders hears how A10 enables service providers to accelerate, secure and optimize their application delivery to drive down costs, enhance service availability, and better respond to customer requirements, so they can improve customer satisfaction, monetize their network, and grow revenues.
LRTV Custom TV
New NFV Use Cases for Cable TV

10|19|16   |     |   (0) comments

A large number of NFV use cases are focused on the enterprise domain, looking at virtualization of customer-premises equipment (CPE). To date, there has been little focus on the use cases and business case for virtualization of the video content delivery networks required to deliver unicast and streaming video to consumers. Amdocs commissioned Analysys Mason to ...
Women in Comms Introduction Videos
Meet the Future Workforce: New Faces, Expectations & Motivations

10|19|16   |   5:33   |   (1) comment

Millennials and their younger peers, Gen Z, expect more out of their network and more out of their work. Intel's Lynn Comp shares how the industry can prepare for this new generation of workers.
LRTV Custom TV
ZTE Global Services User Congress 2016 Highlights

10|19|16   |     |   (0) comments

ZTE held its 2nd Global Service User Conference in Dusseldorf on October 13-14. Representatives from network operators, leading industry analysts and ZTE senior expertsattended the event, exploring the best practice in managed services and the vision to transform network operations into the operations center of the future (OpCF) in the software-defined networking ...
LRTV Custom TV
Cliff Grossner on Cloud & Network Synergy From Carrier Service

10|18|16   |     |   (0) comments

Local carriers offer the collaborated cloud and network service that benefits from their understanding of the regulations operating in different vertical markets.
In this interview, Cliff Grossner from IHS Technology talks about how this advanced service can support business agility and flexibility.
LRTV Custom TV
VeEX: Live from SCTE Cable-Tec Expo 2016

10|17|16   |     |   (0) comments

Cyrille Morelle, VeEX's President and CEO, talks with Light Reading's Alan Breznick live from the SCTE Cable-Tec Expo 2016. They discuss DOCSIS 3.1 technology, deployments and early lessons learned. New products on display include the CX350s-D3.1, CX380s-D3.1, CX310, AT2500-3G, FX150 OTDR and MTT WiFI Air Expert.
LRTV Custom TV
Smith Micro's Carrier-Grade WiFi Component

10|17|16   |     |   (0) comments

Join Carol Wilson of Light Reading as she interviews the CTO of Smith Micro, Dave Sperling.
Upcoming Live Events
November 3, 2016, The Montcalm Marble Arch, London
November 30, 2016, The Westin Times Square, New York City
December 1, 2016, The Westin Times Square, New York, NY
December 6-8, 2016, The Westin Excelsior, Rome
May 16-17, 2017, Austin Convention Center, Austin, TX
All Upcoming Live Events
Hot Topics
Verizon Wants More Data on Yahoo Breach
Alan Breznick, Cable/Video Practice Leader, Light Reading, 10/20/2016
US Issues Total Flight Ban on Samsung Note 7
Dan Jones, Mobile Editor, 10/15/2016
Oh Snap! Qualcomm Unveils X50, Its First 5G Modem
Dan Jones, Mobile Editor, 10/17/2016
Telecom Italia Plots Digital 'Overlay,' Not Transformation
Iain Morris, News Editor, 10/17/2016
Rogers Says See Ya to CEO Laurence
Mari Silbey, Senior Editor, Cable/Video, 10/17/2016
Like Us on Facebook
Twitter Feed
BETWEEN THE CEOs - Executive Interviews
Join us for an in-depth interview between Steve Saunders of Light Reading and Alexis Black Bjorlin of Intel as they discuss the release of the company's Silicon Photonics platform, its performance, long-term prospects, customer expectations and much more.
There's no question that, come 2020, 5G technology will turn the world's conception of what mobile networking is on its head. Within the world of 5G development, Dr. ...
Animals with Phones
Live Digital Audio

A vital part of increasing the number of women in comms is transforming the ways companies can support and empower women. While progressive company policies that support both men and women in achieving work-life balance are a step in the right direction, creating a company culture that supports those policies can at times be more challenging.

During this show, we'll talk to Lynn Comp, Senior Director of Industry and Sales Enabling (ISE) in the Network Platforms Group at Intel, about why those challenges exist and how companies can overcome them. She'll provide insight into how Intel has worked to create a culture that supports work-life balance, and provide steps and guidance for other companies wishing to do the same. We will also leave plenty of time to get your questions answered live on the air.