Apple Thinks Mobile Service Providers Will Not Cut iPhone Subsidies

Mobile service providers globally are unhappy about the impact to earnings and cash flow phone subsidies are causing. Most undoubtedly would prefer not to subsidize devices at all. But it is a complicated issue. How many consumers would be so happy to buy an iPhone if it cost $500 to $600?

We might soon find out as prepaid service providers start to offer Apple iPhones in conjunction with prepaid service, with no device subsidies.

Apple's CFO Peter Oppenheimer, and head of Internet services, Eddy Cue, don't believe carriers actually will cut subsidies for iPhones. They argue that iPhones are important reasons why customer churn is lower, among iPhone users, than among users of other devices.

And in a saturated market where gaining a customer essentially means taking that customer away from another mobile service provider, anything that measurably reduces churn is a very-helpful tool indeed.

Apple believes that the iPhone, which has the industry's lowest churn rate of under two percent is in part a result of customer affinity for the device, and also drives higher adoption of family service plans, which further reduces churn.

Though service providers might not agree, the typical iPhone $400 subsidy also is the foundation for service provider data revenues of about $1920 over a two-year period when signing up a customer to a typical $80 monthly plan.

Naturally, Apple argues that any carrier than abandoned subsidies would lose lots of customers to other carriers who do offer subsidies.

But carriers are unlikely to keep experimenting with ways to avoid the subsidies. Vodafone allows users to pay in installments for phone purchases, with zero interest charges, over a period of a year or two.

In fact, service providers now are effectively trying to dissuade consumers from upgrading phones, by adding upgrade fees of perhaps $30 to $35 when existing customers want to buy a new phone. That might seem counter-intuitive, but an existing customer who can be persuaded to continue service with a device that already has been amortized does improve a service provider's lifetime profit margin and revenue from that account.