Last week, AT&T CEO Randall Stephenson told attendees at a NYC investor conference that the era of subsidizing phones is coming to an end as carriers can no longer “afford” to foot up the bill. If you think this sounds ridiculous coming from the same carrier that crows about its record smartphone sales and increasing wireless revenues, then you are not alone.
Former Apple executive Jean-Louis Gassée takes AT&T to task over this comment by CEO Stephenson, saying this shameless whining needs to stop. Gassée points out that there is no subsidy absorbed by the carrier as customers are locked into a contract for two years. By reducing the price on a phone and requiring a minimum term of service, Gassée argues that carriers are offering a loan to customers that is paid back as part of the monthly service plan. Gassée likens a carrier to a loan shark that wants its customers to get hooked on the service and encourages them to come back for new phones, thereby securing a never-ending revenue stream.
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.
This ever-revolving payment stream can be quite substantial for carriers like AT&T. A quick look at AT&T’s Q3 2013 earnings report reveals that AT&T sold a record number of smartphones in the quarter, increasing its postpaid smartphone subscriber base by 66 percent year over year. As a result, wireless data revenues increased 17.6 percent and postpaid data ARPU (average revenue per user) increased 16.7 percent year-over-year. In fact, AT&T points out in its earnings report that its ARPU for smartphones is more than twice that of non-smartphone subscribers. It appears that these customers that AT&T can no longer afford are the same ones bringing in all the revenue for the carrier.
What smartphones are causing all this money trouble for carriers like AT&T? It’s primarily the iPhone, which fetches top dollar from Apple and from AT&T. As noted by Horace Dediu, “the iPhone is primarily hired as a premium network service salesman. It receives a “commission” for selling a premium service in the form of a premium price. Because it’s so good at it, the premium is quite high.” It’s this commission that has AT&T in a tizzy.
Gassée concludes by saying, “All this leaves carriers with conflicted feelings: They like their iPhone salesman but, like short-sighted bosses who think their top earner makes too much money, they angle for ways to cut commissions down.”