There’s some hubbub across the internet this week that wireless carriers are none too happy selling iPhones to their customers. The discussion stems from a recent CNNMoney interview with Nomura Securities analyst Mike McCormack, who said:
“A logical conclusion is that the iPhone is not good for wireless carriers. When we look at the direct and indirect economics that Apple has managed to extract from the carriers, the carrier-level value destruction is quite evident.” The site notes that Verizon Wireless’s EBITDA service margin has dropped from an average of 46.4% per quarter to 42.2% since the carrier added the iPhone to its lineup one year ago. (via BGR)
I’m sorry to say that Mr. McCormack is off the mark with this one. As a regular UNTETHER reader, you already know why Verizon and AT&T lost billions padding Apple’s record setting gains: it was worth the investment! The real issue here isn’t the iPhone, it’s Apple and their business practices. And the carrier to prove it isn’t Verizon or AT&T, but Sprint.
It’s amazing that the iPhone, as expensive as it is, is in such high demand with even the most casual smartphone user. Wireless providers always excited when they are able to entice what once was a basic cell phone user, bringing in only voice ARPU of $25-$40, into upgrading their handset and adding data plans merely to tweet and upload pictures to Facebook. As I mentioned previously, these upgrades are generating better revenue and bursting their data year over year growth rates.
Ultimately, the iPhone user is the most profitable customer on all the telcos’ books. Hefty subsidy or not, these customers that are responsible for lifting ARPU to 1.9x more than a regular cell phone user.
The high-end cost of the iPhone is also creating a ‘smartphone lite‘ market being pushed by major wireless providers such as AT&T and Rogers in Canada. Thorsten Heins, RIM’s new CEO, stated in January that this will be a strategic initiative as he re-brands and re-positions the BlackBerry device on retail phone bars. RIM knows this is still an underdeveloped market segment of customers. Thorsten is not alone with plans to capitalise on the migration of those customers moving off basic cell phones but not yet ready for a sleek, data intensive iPhone or Android device.
It’s clear that the iPhone has proven beneficial to the overall adoption of smartphones and for wireless providers transitioning their customers onto data plans to lift their overall ARPU revenues. So what about Sprint? In addition to the net losses we saw AT&T and Verizon post in January, Sprint has come to the table reporting $1.3 billion in losses for quarter end. However, Sprint didn’t have the liberty of blaming pension hits and bad M&A deals. Its losses were all upfront costs paid to Apple so it can join the pack and finally carry the world’s bestselling smartphone.
It seems like Sprint has done a deal with the devil. Sprint reportedly had to fork over a committed $15.5 billion in inventory purchases to Apple for the next 4 years, buyers or no buyers. Sprint reported that taking on the iPhone has damaged its operating profits by a staggering $630 million (that’s nearly 50%). Sprint also made it clear that it will be at least 2015 until the company can see positive ROI on adopting the iPhone into its line-up.
Did Sprint bite off more than it can can chew by letting Apple bully it into leveraging the present, just to have the iPhone in the future? At a time where we see most wireless providers are allocating cash flow for spectrum auctions to LTE network infrastructure builds, where is Sprint? Arguably, in last place, with a crippled operational profit to carry a device that isn’t expected to bring their business a positive impact for another 3 years. Which begs the question: how is Sprint going to keep a future base of iPhone users happy when it is so far behind the LTE curve compared to AT&T and Verizon?
The fact that Apple indirectly forces tier two telcos to sign long term commitments simply to have the opportunity to carry its product – even when it’s barely financially feasible – is, in my opinion, unfair business practice.It’s not the iPhone that’s the problem; it’s certainly the milkshake that brings all the boys to the yard. The problem is Apple’s fat profit margins and practice of creating inventory shortages. It’s bully business deals like this that make it difficult for wireless providers and retailers to carry what all customers want and still be able to turn a profit.
When it comes to doing business with consumers, Apple is the model of perfection. However, partnering with telecommunications companies brings out theMr. Hyde in Apple. Apple seems to do business with a heavy handed philosophy that wireless service providers are simply a means to an end: selling as many iPhones as possible. The cost required to do this is falling mainly on the backs of the telcos and Apple isn’t losing sleep over that fact. I suppose Apple’s success has proven that you can bite that hand that feeds you and still prevail.