AT&T CEO Randall Stephenson explained last week that carriers can't afford to continue paying huge subsidies to smartphone manufacturers like Apple.
When you're growing the business initially you have to do aggressive device subsidies to get people on the network. But as you approach 90 percent penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can't afford to subsidize devices like that.
This is rather misleading. If carriers weren't making boatloads of money from subsidizing popular smartphones in exchange for meaty two-year-long contracts, they wouldn't be doing it.
Let's assume, for the sake of simplicity, that AT&T pays Apple a full US$600 for a 16 GB iPhone (historically, this figure is in the ballpark of reality). AT&T is then able to sell that very same phone for $199. That's a $400 hit AT&T is taking at the outset. But in exchange, AT&T is securing 24 months of steady payments that more than make up for that initial loss.
Former Apple executive Jean-Louis Gassee recently skewered Stephenson's remarks, and really hits the nail on the head when describing the real economics at play with carrier subsidies:
I don't know if Stephenson is speaking out of cultural deafness or cynicism, but he's obscuring the point: There is no subsidy. Carriers extend a loan that users pay back as part of the monthly service payment. Like any loan shark, the carrier likes its subscriber to stay indefinitely in debt, to always come back for more, for a new phone and its ever-revolving payments stream.
There are undoubtedly other economic models in the smartphone business that carriers would prefer to employ, but the notion that carriers can't afford to subsidize smartphones, while wholly ignoring the benefits they receive in return, is nothing more than unsound logic.
Also keep in mind that the bulk of carrier revenue comes from smartphone users. Offering them subsidized phones to lure them in as a means to bolster revenue streams seems more than affordable to me. Besides, iPhone users in particular pay, on average, more in monthly fees than other smartphone users.
A research report from earlier this year found that nearly 60 percent of iPhone users have monthly bills in excess of $100. I think the carriers are doing just fine.