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.”