For service providers, the effort is to maintain profit margins that have in many cases been hammered by the cost of the subsidies. But the new policies also should slow iPhone sales, and should boost sales of other devices. Consumers will slow the rate of device upgrades and will face higher prices.
The impact on application and device innovation is less clear, but could lead to some slowing of device upgrades, with uncertain but clearly negative impact on new applications that depend on device features and capabilities.
Up to this point, for example, Verizon has not charged a fee to its subscribers when customers decide to upgrade to a new device. But Verizon now will institute a $30 fee when that occurs. For Verizon Wireless, that could add up to $1 billion to Verizon’s annual earnings, and also boost profit margins, BTIG argues.
Smart phones have been very helpful for mobile service providers, boosting average revenue per user by driving mobile broadband subscriptions. But the subsidies generally used to spur sales are bcoming a major drag on earnings, and change is coming. Basically, service providers will have to risk lower sales growth, and less mobile broadband revenue growth, to limit handset subsidies. It might be a Faustian bargain.
In fact, what seems to have happened is that user behavior has changed, with users upgrading those “expensive” smart phones faster than they had generally been upgrading their feature phones, analysts at BTIG say.
As a result, U.S. mobile service providers plan to take steps to reduce handset upgrades as a way of raising operating margins. That is likely to affect sales of Apple iPhones, generally considered the most-expensive device to support.
AT&T, Sprint, Deutsche Telekom, Vodafone, America Movil and Telefonica are among firms planning to take steps that will slow iPhone sales in the coming year.
In the United States, BTIG expects iPhone sales to decline four million sequentially to nine million with the largest impact coming from AT&T, Apple’s largest customer.
In 2011, AT&T represented 17 percent of iPhone sales for the year and 19 percent in the fourth quarter of 2011. Apple iPhones represent fully 37 percent of AT&T’s post-paid subscriber base and 47 percent of post-paid service revenue, BTIG says.
BTIG estimates 65 percent of AT&T’s post-paid customers either own an iPhone or are in a family plan with at least one iPhone user.
For AT&T, the financial impact of iPhone subsidies is clear. AT&T profit margins had grown for five straight years beginning in 2005, but reversed in 2010, apparently related directly to iPhone 4 demand and subsidies, BTIG argues.
In January of 2011, AT&T tightened its upgrade policy and eliminated the popular one-year upgrade offers for iPhone owners. BTIG argues the iPhone subsidies have reduced AT&T margins by at least 10 percent in 2011.
So unless AT&T tightens its upgrade policies, company earnings per share would drop. In fact, AT&T says it has built its business model for 2012 around the idea that it will sell no more smart phones, overall, than it did in 2011, about 25 million units.
BTIG analysis suggests something quite significant. Despite the importance of smart phone accounts for growth of key broadband revenue, AT&T has decided to essentially cap smart phone sales to preserve its profit margins.
The impact should be clear: fewer iPhones sold by AT&T, and possibly fewer iPhones sold by other mobile services providers. That could lead to market share gains by other smart phone makes and models, or could spur Apple to produce lower-cost iPhones.What the carriers hope for is the ability to sustain average revenue per user growth, and higher profit margins.
source: Yankee Group and CNet
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