Here's Why AT&T is Intentionally Slowing iPhone Sales

Compared to other key competitors, AT&T sells more iPhones. 


Since iPhones impose the greatest subsidy burden, AT&T gains if it sells a mix of devices carrying lighter subsidy costs. 


The cost of such handset subsidies has become a bigger issue globally, as every service provider struggles with the operating cost issues such subsidies represent.


It is no secret that mobile service providers globally want to reduce the amount of money they spend to subsidize smart phones for their customers.

The problem is that the subsidies raise operating costs, and thus affect cash flow.

Of course, it can be argued that such subsidies also provide value, in part by reducing customer churn, as consumers often must sign contracts to qualify for the device subsidies.

Some would argue that although there is a positive churn reduction effect, the amount of reduced churn  is only 27 percent of incremental subsidy cost for AT&T and 45 percent for Verizon.

This means AT&T is actually losing more than $2 billion by providing iPhone subsidies, for example, while Verizon is losing nearly $1 billion. Verizon's "losses" are lower because it has sold fewer iPhones than AT&T. Over time, that gap should close.

Mobile service providers aren’t happy about the cost of device subsidies that cause a drag on earnings. 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.

BTIG argues the iPhone subsidies have reduced AT&T margins by at least 10 percent in 2011, for example.

But the trick is how to wean customers off the subsidies without seriously slowing the smart phone adoption rate, since most smart phone customers, given a choice, buy subsidized devices, with a contract, rather than paying full retail price and buying service without a contract.

Up to this point, the decision hasn’t been terribly difficult. A Motorola Mobility Holdings Droid 4 costs $549.99 without a contract and a 16-gigabyte Apple iPhone 4S, which runs only on 3G networks, is $649.99. Verizon Wireless offers both devices for $199.99 with a two-year data plan commitment.

It therefore comes as no surprise that nearly all customers choose to buy a subsidized device.

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 in April 2012 announced it would charge 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.

But that’s not all. Verizon Wireless now will provide incentives for users to pay full retail for their devices, using the bait of “unlimited” mobile data plans. That is likely to cause buyer sticker shock, though.

The new Verizon Wireless plan to end "unlimited" service and move users to capped plans primarily is aimed at matching end user data consumption to usage. But Verizon Wireless also appears to be using the opportunityto wean customers off device subsidies.

Verizon says "when we introduce our new shared data plans, unlimited data will no longer be available to customers when purchasing handsets at discounted pricing," unless of course the customer wants to pay full price for a device.

One might doubt the “full retail phone price, unlimited usage” plan will be chosen by many customers, though.

On the other hand, it is an interesting way of enticing some users to pay full retail for their devices. One wonders what Verizon might think of next, aside from simply raising the prices of devices sold with contracts. 

In the meantime, suppliers such as Virgin Mobile and Cricket Communications should provide an early real-world test of demand, as both those mobile service providers will sell iPhones at full retail.

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 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. 

Vodafone's Spanish division is bringing back cut-price smartphones for new customers for a limited time, the firm said on Monday, prompted by a mass client exodus in recent months after scrapping handset subsidies in the recession-hit country, Reuters reports.

The move illustrates the clear danger for any single service provider that attempts to break from established practices that consumers find helpful, such as selling hot new devices at subsidized prices, even if that means consumers need to sign a service contract.

Vodafone says the policy is temporary, and will end September 15, 2012.  

Vodafone and Telefonica, with almost 70 percent market share between them, have suffered huge subscriber losses since they decided to use Spain as a test case for a new business model that cuts subsidies for smartphones.

Vodafone has lost over 600,000 mobile clients since April, when it stopped slashing prices on smartphones, while Telefonica's Movistar lost 572,000 in April and May, according to data from Spain's telecoms regulator.

It remains to be seen whether Vodafone actually will reinstate the "no subsidies" policy after September 15. Given the crushing recession in Spain, Vodafone probably needs to do everything it can to stem the subscriber losses, and boost uptake of smart phone services.

Mobile service providers in Spain lost a quarter of a million clients in May 2012, the fourth consecutive month of subscriber losses, la Comisión del Mercado de las Telecomunicaciones says.

The industry also lost 380,000 customers in April 2012, according to the Spanish telecommunications commission.

Precisely why customers are deserting is the issue. Spain is in what might be called a deep recession, so it is possible customers are dropping their mobile subscriptions to save money.

And it remains true that prepaid service, which offers consumers more control over their spending, continues to gain customers, which might reinforce the notion that economic distress is causing what might be called an unusual negative move in mobile subscriptions.

But some might suspect that the industry's end of subsidies for handsets also has had some negative impact, primarily by shrinking the number of new accounts mobile service providers need to add every month to compensate for departing customers.