AT&T’s long road to iPhone profitability
By Ronald O Carlson
A new study shows that Ma Bell’s hefty Apple handset subsidies coupled with high customer acquisition costs and heavy, heavy data use once those subscribers are on board likely means America’s second largest wireless carrier must wait until the final months of a two-year contract to turn a profit.
When it comes to making money selling and supporting the iPhone, News.com reports that AT&T has its work cut. Specifically, Yankee Group data parsing Ma Bell’s Apple handset business practices purports to show that the carrier doesn’t begin making a profit until the 17th month of each 24 month contract.
Care and feeding of a golden goose
In addition to the minimum $300 subsidy AT&T pays to Apple, iPhone users heavy data use, which has led to accelerated network upgrades and customer support costs, weighs heavily on the bottom line. For example, company Ralph de la Vega, CEO, Mobility and Consumer Markets, said in August that the carrier’s wireless data usage jumped almost 5,000 percent from 2006 to 2009.
Further, with smartphone price and service competition heating up rapidly, each new customer is not only demanding, it costs AT&T more in marketing costs, as well as the aforementioned subsidies, and and support costs, to capture to capture and keep these precious high value subscribers.
“Until now, North American operators have been kings of the devices market, controlling distribution and bearing many of the risks,” Andy Castonguay, director, Yankee Group. “Rising customer acquisition costs, exclusivity fees and flat-rate pricing are squeezing margins for coveted smartphone users. To reverse this trend, operators must spread the control and risks across OEMs and retailers to offer more affordable options and establish greater levels of clarity and trust with consumers.”
What’s the take away?
Whereas, Blorge has repeatedly reported about dropped calls and outages in New York and San Francisco, the other side of the coin is that the iPhone is dominant in those cities. So, as AT&T builds out its network, demand rises quickly to meet and just as often exceed capacity.
The killer here is that with computing devices becoming ever more mobile and the network becoming the computer — call it convergence squared — there’s really no end in sight for the carriers or device makers. Yes, Apple’s iPhone has turned the table in favor of hardware manufacturers and to a large degree users but, as Yankee Group points out, the carriers can’t keep bearing the majority of these costs alone.
They add that removing the $300 per handset subsidy from the balance sheet improves AT&T’s iPhone profitability by 33 percent.
What Yankee Group doesn’t quantify, at least as quoted by News.com, is who’s going to pay full retail for an iPhone, Blackberry, Sidekick or any other smartphone given the often abysmal service they can expect in return? Further, there’s a strong awareness among smartphone subscribers that they’re already paying top dollar — over $90 per month on average for iPhone owners — for the privilege 30 percent dropped call rates and patchy high-speed network coverage.
Although Yankee Group certainly has a point, is AT&T going to risk losing all of those users and all of that money just because it’s difficult? Which of AT&T’s competitors wouldn’t love to be in Ma Bell’s shoes right now? Yes, AT&T is working overtime and paying heavily for the privilege, but they’re also gaining a huge, world class network and millions of free spending subscribers.
Color me stupid, but that sounds like a virtuous (and, yes, a little painful) cycle to me…
What’s your take?
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Stumble It!
October 14th, 2009
Not much different from all the dreams of ISP gold from the ’90’s that led to being upside down from underutilized capacity in the overbuilt infrastructure. I wouldn’t look for tethering anytime soon.
Those cheap Netbooks are also competition coming on strong.
http://www.dslreports.com/shownews/Verizon-Expanding-Subsidized-Netbook-Offers-104691
In answer to your question: Version. I learned a long time ago when your outgo exceeds your income, your upkeep becomes your downfall. Profitless prosperity might benefit consumers in the short term, but some adjustment is in order if you are killing the host.
October 14th, 2009
IMO ATT is not suffering from the Iphone. Look at the sales rate. How many people are tied into a long term contract and will the stick with the Iphone? The stickiness rate on the Iphone is extremely high so ATT needs to be concerned about Verizon getting a contract. The network is what it is. People bitch, but we did the same when we were running a modem over a POTS line. It will get better, but it takes time. The Teleco’s need to price their service where they make money. If they can’t figure that out, then oh well. ATT has a great idea of what kind of data a unrestricted user will use. Their challenge is to get to a price point where they have devices which attract users at that price and make money.
October 16th, 2009
This will AT&T a lot. It will increase its profit as well as revenues and market value. This might be the best deal they have in recent past.