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.
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.
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