Speaking to investors at the UBS Global Media and Communications Conference in New York on Tuesday, AT&T (T) CEO Randall Stephenson said the current rate of subsidies afforded on smartphones will likely have to change, altering the economics of the devices for all parties involved, including consumers. "When you're growing the business initially, you have to do aggressive device subsidies to get people on the network," he said. "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."
Devices such as the iPhone, Samsung Galaxy S4 and other high-end smartphones receive heavy subsidies from the carriers, including AT&T, Verizon (VZ) and T-Mobile USA (TMUS), in order to draw customers. Carriers reap those subsidy payments back and then some by charging customers with expensive plans, largely for data services.
T-Mobile has been the first to separate monthly fees for the device and phone services, allowing users to enter its Uncarrier program. It also has a $0 down program to buy a new iPhone 5s or iPhone 5c, and then the cost of the phone is paid via installments on customers' monthly bills.
The subsidies can run up to around $400 per phone, depending upon the model. A 64GB iPhone 5s costs $849, but consumers can get it through Apple's Retail Stores or their choice of carrier for as little as $399, due to the subsidies.
A change in subsidies would be a big issue, at least for domestic buyers, who have been used to having the cost of the phone subsidized initially, and then paying it back over time via higher cell-phone bills.
This could potentially impact Apple, which has relied on the iPhone as its primary revenue driver. In Apple's fiscal fourth quarter, the company sold 33.8 million iPhones, accounting for $19.51 billion in revenue. The iPhone made up over 52% of Apple's revenue, and any hit or potential threat to the company's main business line is not to be taken lightly.
Apple CEO Timothy D. Cook said in a 2012 earnings call that subsidies were not something he was worried about. "From the carrier's perspective, I think it's also important to remember that the total subsidy that they pay is fairly small relative to the monthly payments they collect over a 24-month contract period," Cook said. "And I think many would tell you, they certainly told to me, that iPhone has several advantages for them over other smartphones, the churn rates are much less, you see carriers now focusing on shared data plans and I think an iPhone customer is likely more - is more likely to have a Tablet or an iPad. And so I think they really value these customers quite a bit."
Since that time, we've seen carriers move towards programs where consumers are able to upgrade their phones faster than every two years, due to the increasing rate of technology and the "I want the latest" mentality amongst consumers.
It will be interesting to hear what Apple has to say regarding subsidies, if anything, in its upcoming earnings call. Apple is scheduled to report fiscal first-quarter earnings in late January. Analysts surveyed by Thomson Reuters are looking for Apple to earn $14.01 per share, on $57.276 billion in revenue.
Shares of Apple were higher in early trading, gaining 0.59% to reach $568.88.-- Written by Chris Ciaccia in New York
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