Do Mobile Service Providers Benefit from Device Subsidies?

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," Verizon says, 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.

European Mobile Roaming Prices Drop July 1, 2012

Mobile data charges will be price capped starting July 1, 2012, with the limit set at no more than €0.70 a megabyte. That will represent a decline of about 75 percent, at least for European Union residents using their devices in other EU member countries.

The EU rule does not affect the prices providers can charge for data roaming outside the European Union. It isn't yet clear how much service provider revenue will be reduced. 

The EU market for mobile roaming services can be divided into voice services, SMS and

In 2009, the retail EU roaming market accounted for 4,777 billion EUR in revenues, a study noted. 

Some 71 percent of that was voice roaming charges, 17 percent for data and around 11 percent for SMS. 

The total wholesale market size in 2009 amounted to 1,253 billion EUR.

Roaming revenues appear to represent around 3.68 percent of the total EU mobile market. Between
2007 and 2009, revenues for voice roaming fell quite significantly as a result of both lower
prices as well as lower volumes of traffic (-3,2%). 


For SMS roaming, the impact of the regulation was seen in lower service provider revenues in 2009 compared to 2008.


For data services, the increase in volume of 43,6 percent between 2008 and 2009 combined with the imposed decrease in wholesale prices led to an overall decrease in revenues, the study says. At the retail level, however, where no price ceilings were imposed for data roaming, the total revenues in 2009 remained at the same level as in 2008.




The new European Union law means that prices for making a call abroad will be lowered to 29 cents per minute, while it will cost eight cents to receive a call, nine cents to send a text and 70 cents per MByte  of download data used. This is a saving of 75 per cent compared to roaming costs in 2007. 
Vodafone "Euro Traveller"  allows U.K. customers to pay no more for calls, messages and data when they're on the continent as they do at home, after an opt-in payment of £3 a day.

The Everything Everywhere brand will offer customers the opportunity to buy "Travel Boosters" when they use their smartphones or 3G modems overseas.

Smartphone owners can pick 3, 10 or 50MB bundle for £1, £2.50 and £10, respectively - or 33p, 25p or 20p a megabyte. Each bundle lasts for 30 days or until the data has been used, whichever comes first.

For modem owners, the price bands are 3, 20, 50 and 200MB, priced at £1, £5, £10 and £35, respectively. Again, that's 33p, 25p, 20p and 17.5p a megabyte.

Google Now Launches

Real-time and personalized information, essentially streamed automatically, is the value.

MasterCard and Deutsche Telekom to Launch Payments

MasterCard Worldwide and Germany-based Deutsche Telekom group have signed a partnership agreement that will help the telco launch a prepaid PayPass application for its planned NFC mobile wallet.

The deal likely will be similar to a mobile-payments partnership announced by U.K.-based Vodafone Group and Visa, which uses a prepaid mechanism to load cash onto a user mobile device.

7-Eleven Stores to Sell PayPal Prepaid Cards

The PayPal Prepaid MasterCard card will be available at roughly 5,500 7-Eleven 7-Eleven stores nationwide once its rollout is completed this year.

Customers will be able to reload cash onto their cards at these locations, prepaid card marketer NetSpend Holdings says.

Here's the tie to mobile payments and banking. As with the M-Pesa service, retail agents are often the places users load cash and receive cash, even if the mobile device supplies the messaging function. Also, the way cash will be loaded onto many mobile payment accounts is by linking to an offline prepaid account of some kind, as with the Starbucks mobile app.

Research in Motion Has 3.6% U.S. Device Share, Down from 41%

For Research in Motion, it has been a tough four years, as U.S. device market share dropped from 41 percent to 3.6 percent.

A Third of Kenya's GDP Now Passes Through M-Pesa

If you were to nominate one mobile money service, today, as the most-successful on the planet, it would hard to propose any company but M-Pesa. By some accounts, about a third of Kenya’ gross domestic product passes through M-PESA and Safaricom earns more money from M-PESA than it does from text messaging, in part because SMS tends to be bundled, free of charge, in the payments system.

In August 2011, the Wall Street Journal reported Vodafone earned $21 million through its Kenyan subsidiary, with $15.6 million coming from M-Pesa in license fees. As of November 2011 M-Pesa had over 14 million subscribers (out of a population of about 40.5 million, according to the World Bank) and more than 28,000 agents across the country versus around 600 ATMs

M-Pesa is operator-centric, working through a SIM toolkit application that sits on all Safaricom SIM cards.

To put money on your phone, you walk into an authorized agent, hand over your money, then receive an SMS saying that the money has arrived on your phone. To send money to someone, you go to the pay menu on the phone, look for the person in your phonebook, or add their details, then send them the amount. They get a message saying, in effect, “If you have an M-PESA account, you now have 50 shillings [say] on your phone. If you are not an M-PESA account holder, go to any agent and they will give you the money.”

Mobile TV is a Feature, not a Product, Yet

At the moment, services such as "TV Everywhere" that allow users to view some of the video they purchased as part of their subscription video services on a smart phone or tablet remain a "feature," and are not yet envisioned as revenue-generating "products."

That would not be an unusual pattern. Service provider Wi-Fi hotspot access has become a feature of a broadband subscription, whether provided by a fixed or mobile network. That seems to be the developing pattern for mobile TV services tied to another subscription.

Smartphone or tablet apps that are tied in to a cable TV show are definitely about "discovery and engagement," not advertising revenue, said Tammy Franklin, Scripps Networks Interactive senior vice president of affiliate sales and new media distribution.

For Verizon Wireless customers, unlimited U.S. domestic voice and texting essentially now are features of a mobile service, not discrete products. The basic connection fee includes both voice and texting.

House Hearing on Video Market Shows Growing Pressure within the Ecosystem

The House Energy and Commerce Subcommittee on Communications and Technology held a hearing on whether existing communication laws address the demands of new technology. Such hearings do not, in and of themselves, mean much. But it is just one more sign that pressure is building within the video ecosystem.

Many speakers noted that regulations currently in place are outdated and stem from a time when cable companies controlled a much larger portion of the subscription video market.

Some Business Problems Cannot be Solved

Put yourself into the role of CEO at either Sprint or T-Mobile USA. What is the answer to the question of how you will catch up to Verizon Wireless and AT&T? And make us believe it. 

It's tough. Tough, in fact, because there are some problems in business that are hard, perhaps impossible to fix. One of those intractable problems is market share structure in a well-developed industry. 


Typically, a rule of thumb suggests, the market leader has twice the share of the number-two provider, which in turn has twice the share of number three, and then share falls off dramatically after that. 


It might be more accurate to say that market share has a direct bearing on profit margins, as well. 


The U.S. mobile market does not have precisely that classic stable distribution. Verizon, early in 2012, had about 32 percent share, AT&T about 26 percent. 


Sprint had about 16 percent and T-Mobile USA had about 10 percent. 


That suggests, to some of us, that the market remains unstable, and would be expected, over time to move in the direction of the "classic" structure. That doesn't mean real-world markets always assume the classic structure perfectly, only that the stable structure of a market will feature dramatic differences in both market share and profitability. 


But regulators will have a say, having already firmly suggested that AT&T could not grow to 38 percent market share. 


That suggests, over time, combinations of the smaller providers. The point is that one might argue there actually is little executives at firms such as T-Mobile USA and Sprint can do to fundamentally alter the direction of the market, no matter how talented they might be. 

Google Isn't Making Any Profit From Sales Of The New Nexus 7 Tablet

Andy Rubin, Google's head of mobile, says Google is selling its new tablet "at cost" through Google's online store. "There's no margin," he said in the interview. "It just basically gets (sold) through."

In fact, Rubin says the company is eating the marketing costs for the device. Like Amazon, at least for the moment, the device is seen as a platform for creating revenue streams other ways.

But that, in general, is probably the way Google approaches its entire set of efforts in consumer electronics: creating products that drive usage and then revenue from the software and content products it creates.

That is more the "Amazon" strategy than the "Apple" strategy.

What Kind of Company is Google Becoming?

With the launch of its first tablet, a seven-inch device that seemingly is aimed more at Amazon than Apple, Google has added yet another device to the list of gadgets it now produces, ranging from smart phones to a new home entertainment system.

The new tablet, priced at $199, makes Google an even more complicated company. The $299 home-entertainment player called Nexus Q likewise further blurs Google's identity, you might argue.

Google always has said it is a software company. Its revenue comes mostly from advertising, especially from Google's search engine. That has made Google the paramount example of something we haven't seen before, namely a software company whose revenue comes from advertising, primarily.

Some of us would have said that Google might as well be called a media company, as well, with its YouTube operations and especially revenue model. What sort of company makes its money from advertising? Traditionally, only a "media" firm.

But now Google is becoming a supplier of consumer electronics as well. Ignoring for the moment all the other lines of business Google is experimenting with, it has become even harder to figure out what to "call" Google.

Google itself still says its mission is to organize all the world's information. But it also says it does "search" and products that "make the web better."

One has to conclude that Google simply is at a point where it is changing into "something else," and it is hard to describe what that "something else" actually might be.

Why Google has gone "Mobile First"

If you want some evidence about why Google has gone "mobile first" in its product strategy, a few key statistics Google announced tell the story well.


Google says it has 250 million total users, 150 million monthly users and 75 million daily users, with more usage from mobile than desktop TechCrunch says.  

Is Telecom Italia Going to Structurally Separate Itself?

A unit of Cassa Depositi & Prestiti may invest three billion euros in a partnership with Telecom Italia that would structurally separate the Telecom Italia network from the retail services unit. Since 2008, Telecom Italia has operated its network as a functionally separate entity with extensive wholesale operations. 


The new rumor suggests that Telecom Italia is prepared to go the next step and fully separate the network operations part of its business, Bloomberg reports.


Telecom Italia's "Open Access" unit, which has the network infrastructure and employs a 19,000 people in maintenance and operations, might be in play, whether the recent report is true or not (Telecom Italia denies the rumor).


CDP also  says it “isn’t aware” of the proposal. What might be more true is that Telecom Italia is seriously considering structurally separating its network assets business from its retail telecom services business. 


Italy lags Europe in terms of broadband penetration with only 49 percent of households connected against a European average of 61 percent, according to Eurostat data.


Some observers in Europe believe competition will not be sufficient to create conditions for faster broadband investment. Carriers actually argue that current regulations actually discourage that investment. 


The rumored Telecom Italia move might be a way that the telco could essentially give the problem to somebody else. Since 1995, Telecom Italia has operated only fixed networks, as its mobile operations were spun off into a separate company. 


Debt reduction seems to be driving the thinking. Other European telcos are divesting assets as well, in order to trim debt and prepare for investments in mobile services. 

Automatic Mobile Phone Public Hotspot Access?

Some 37 communications companies around the world have signed up to test Hotspot 2 Wi-Fi roaming and billing. 


Aircel, AT&T, Boingo Wireless, BT, BskyB (The Cloud), China Mobile, Deutsche Telekom, DOCOMO InterTouch, Everything Everywhere, FON Wireless, Gowex, Indosat M2, HK CSL, KDDI, iBAHN, KT Corporation, Meteor Network, NTT DOCOMO, Oi Wi-Fi, Orange, PCCW Mobile, Portugal Telecom TMN, SK Telecom, Shaw Communications, Smart Communications, Softbank Mobile, StarHub, Swisscom, Talk Talk, TeliaSonera, Telefonica, TIM Brasil, Time Warner Cable, Tomizone, True Corp., Trustive and TTNET are among the firms participating. 


The Wireless Broadband Alliance says the trials of "Next Generation Hotspots" will test interoperability and performance of new gear that will give users easier access to a far greater number of public Wi-Fi access points around the world.


The trials will take place in the fourth quarter and employ the first generation of Wi-Fi "Passpoint" equipment which the Wi-Fi Alliance today announced it will start approving. The WBA expects the first NGH deployments to take place in H1 2013.


Next Generation Hotspots will allow users to gain access without the need for user names and passwords, while also allowing operators to establish relationships with each other so their users can access a wide variety of hotspots in their own country and around the world. 
HotSpot 2 might also have the potential to be disruptive, though, some might argue.


It has  been some time since anyone seriously argued that public Wi-Fi hotspots could be a  viable alternative to mobile infrastructure. But at least to some extent, HotSpot 2 could create WiFi networks extensive enough, and easy enough to use, that some contestants could offer Internet access either as a non-mobile but outside the home service, or simply offload mobile traffic to the hotspots, as most of the mobile operators hope to do.