Slowing Device Sales are Both a Plus and a Minus for Mobile Operators

Slowing device sales are both a plus and a minus for mobile operators. On one hand, such sales also are associated with new account growth, and contribute to customer retention when the phones are financed over a period of years. 

On the other hand, devices are a significant cost driver and depress cash flow generation. Perhaps profit margins on handset sales are in the 10-percent range. That is offset by any subsidies the operator provides to customers in the form of installment payments. 

 

Pros	Cons
Can help to boost new account additions	Can be a major cost driver
Can make it more attractive for customers to sign up for a plan	Can lead to thin margins on device sales
Can help to lock in customers for longer periods of time	Can make it difficult for operators to compete on price

Say a mobile operator sells a $1,000 smartphone to a customer, but has to pay the device manufacturer $800 upfront. There is, in principle, a $200 profit margin on a device sale. But if that device is sold to a customer on an installment plan, and the installment payment period is three years, then  the $200 is earned over 36 months. This means that the monthly cash flow from device sales will be $5.55, offset by the carrier’s need to essentially carry the cost of inventory, in part, for up to three years. 

For example, AT&T's device installment payment inventory costs were $12.6 billion in 2022. Verizon's device installment payment inventory costs were $11.4 billion in 2022. T-Mobile's device installment payment inventory costs were $7.8 billion in 2022.

So device sales play a dual role in a mobile operator's business model. A subsidized phone is a significant value for many customers. On the other hand, device sales can also be a major cash flow issue for mobile operators.