Is The iPhone Killing Wireless Carriers?By: Zach Walton - February 8, 2012
With all those iPhones sold last year, surely the wireless carriers are doing great, right? Turns out the iPhone is what’s hurting carriers the most.
CNN reports that due to the heavy discounts applied to the iPhone by carriers, sales of the device destroy their bottom lines. Take for instance Verizon, the wireless company that started selling the iPhone in February 2011. Their “EBITDA service margin,” which is a metric that carriers use to “measure their core profit as a percentage of their sales, has dropped dramatically since they began selling the iPhone.
Between 2009 and 2010, Verizon averaged a EBITDA service margin of 46.4 percent per quarter. That fell to 43.7 percent in the quarter that the iPhone went on sale. It plunged even further last quarter when they sold 4.2 million iPhones to 42.2 percent.
Funny enough, their margin bounced back up to 47.8 percent during the third quarter last year. Why is that? People stopped buying iPhones.
AT&T has always sold more iPhones than other carriers which hurts them in a big way. Their margin was at 28.7 percent last quarter, compared to 37.6 percent the year before. The main cause – they sold twice as many iPhones last quarter.
Sprint already had a low margin to begin with, but they really took a beating once they began selling the iPhone. Their margin fell to 9.5 percent from 16 percent a year earlier. Sprint placed the blame squarely on the iPhone for their poor figures.
Analysts agree that the iPhone is bad for wireless carriers. As sales of the iPhone grow beyond anybody’s expectations, the subsidies from the devices will keep on hurting the profits of their carriers.
Carriers pay around $450 per device they sell which is the highest in the industry. AT&T is hurting even more since they offer the iPhone 3GS for free.
Sprint agreed to pay $15.5 billion in up front costs to Apple over the next four years for the device. They don’t even expect to make money on it until 2015.
The cost of adding an iPhone customer is about 40 percent higher than a non-iPhone customer according to Sprint.
Why would these companies destroy themselves over the iPhone then? It’s a matter of keeping customers. Sprint’s CEO told CNN last year that they offered the iPhone because customers were leaving to other carriers that had the device.
The only way that carriers are going to make money off of the iPhone is to raise rates or force Apple to lower their subsidies. Since nobody wants to tell Apple what to do, that’s why carriers like AT&T have been coercing customers into getting more expensive plans.
That’s the only solution making any sense right now so expect to see higher monthly bills in exchange for having an iPhone.