It’s not the iPhone carriers hate, it’s Apple!

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.

About the author

Jennifer Daly

Jennifer has over 4 years experience working in the telecommunications industry, most recently at Rogers liaising with companies such as Best Buy and Apple (and many more) to help successfully launch cable and wireless products. During her tenure she had the opportunity to work alongside top executives who taught her a thing or two about the telco industry. Jennifer is generally always found talking, but really loves talking telco.

  • They do also hate that the iPhone uses the data network they have built much less efficiently than say, a BlackBerry. The capital upgrades carriers have had to make to support the iPhones is pretty substantial and is one reason that for years the carriers still pushed BlackBerries as hard as they could because selling 100,000 BlackBerries puts much less load on the stressed carrier networks than 100,000 iPhones — and just simply due to user bahaviour of the devices, do to the networking technology each employs.

  • Anonymous

    Hi Jeff, 

    Thanks for your comments- you present an interesting argument as it relates to Blackberry’s using less data than iPhone. And while, the capital costs are steep to upgrade network infrastructure to provide more capacity to send data- telcos are not motivated to make these investments purely because of iPhone.  Taking Rogers as an example (since it’s what I know best)- the 3G network they had in place prior to launching the original iPhone was severely under utilized with just BlackBerry and basic cell phones connecting. The capital investments to beef up the network now, will soon be paid for with the amount of data the iPhone4S and iPhone etc… start to suck back. If it wasn’t for the iPhone the telcos wouldn’t have nothing else filling the revenue gaps that were once filled with out of bucket minutes and long distance. Not to mention the technology enhancements of LTE have the ability to not only send MORE data along the pipe line- but it actually sends/receives the data packets in a completely different way making it much more efficient- giving way for more capacity.Like everything, most of these towers are victim to outside elements and need to be replaced on an ongoing basis anyways. There is no escaping that cost.As for pushing BlackBerry’s, I would have to disagree. Yes, most wireless providers still cary the devices in their line up due to loyalty to BBM and by business users.  However, most national campaigns are targeting Android device line ups because it sucks back the data you see iPhone users billing each month (which equals revenue) but these devices have generous up margins leaving the telco with less subsidy costs. I would say, mirroring recent purchase behavior … BlackBerry is 3rd on their priority push list. You don’t see the wireless carriers pushing iPhone outside a device launch, because the device sells itself. It would be a waste of advertising dollars. 

    Another thing to remember is the telcos (especially in the business of both wireless and wireline) know that upgrading their wireless networks for the capacity of not only home phone users cutting the cord and cannibalizing that shift in consumer behaviour. But also the investments wireline requires today to stay current are likely to have a short shelf life for household users who 20 years from now will be completely wireless. You will see this shift purely for device to device connectivity convenience to their car, home monitor systems to the office- while traveling globally (including commute time which gets longer and longer each year) for both business and personal. 

  • Hi Jennifer..

    Interesting, to be sure, with regards to handsets and networks. Naturally the ability to drive data arpu is a critical consideration, as we have long seen here in Japan. The 3 carriers here each book higher total arpu than their U.S. cousins and have already passed the 50% level of data over voice. Increasingly both segments are zero-sum game race to the bottom.
     
    That said, and with significant ”dumb-pipe’ whining overseas these last few years, the real point is that Apple has inserted themselves quite nicely into the value chain by offering a turn-key solution that leeches obvious revenue potential from the operators platform.
     
    Apparently the telcos were too lazy to be a ‘smart-pipe’ and it’s going to be rather difficult to get that genie back in the bottle. Suppose they will have to settle for being a ‘happy-pipe’ with fingers crossed for m-commerce (etc.) to offer some light at the end of that tunnel.

  • It’s true that right now, carriers are not pushing BlackBerry but that’s only changed over the last couple of years. For the first few years of the iPhone, they were still pushing the BlackBerry hard — and I’m mostly talking about the US here as the Canadian infrastructure is different, they use the same tower tech but with fewer high-density zones to cover. US carriers (and AT&T in particular) had serious capacity issues on their 3G networks and the iPhone totally crushed some of them. 

    If you recall, for a while AT&T went full-on marketing mode to get people offloaded to WiFi and bought a network of WiFi hotspots to offset load on the 3G network as that was easier and more cost efficient than upgrading the network infrastructure faster. And note that the marketing was mostly targeted at iPhone users.

    It’s true that LTE has changed the game in terms of capacity but a bigger pipe (even with different tech) still has a limit and very few phones in the market (in people’s hands) are actually LTE right now, they’re basically all 3G still. Until Apple puts out an LTE iPhone we won’t know the network impact of that vs a BlackBerry (as an example) but on the 3G network, I want to say the iPhone used something like 3x or 4x the network capacity per phone than the BlackBerry — which is pretty massive when you think about cell tower density in urban areas.

    I agree on your premise for the article, but the iPhone was not designed (technically) to be looked upon favourably by the carriers while the BlackBerry was and is so carriers do hate the iPhone as well — though since Apple makes it that means they hate Apple too =)

  • Matthew Nelson

    It would be a mistake to single out apple for forcing carriers into long term iPhone deals they can’t afford…Truth is, It’s the same tactic that the carriers use selling the iPhone to consumers.  There are increasing numbers of people paying $1000/yr for phones they can’t afford.

  • Hey Matthew,

    I don’t think that anyone would disagree with you that carriers also participate in tomfoolery. I think the scale and intensity here are a little different, however. Yes, carriers do lock customers into long term contracts, but that isn’t guaranteed disaster – it’s up to the user to choose the most affordable plan. And as Jennifer has argued (http://untether.tv/2012/understanding-smartphone-leases-carrier-contracts-are-evil-right-part-1/) contracts are the issue so much as device/plan flexibility.

  • Good point Jeff, but carriers treat BlackBerry users differently, RIM saves the carriers so much bandwidth but we get nothing for helping them in fact we get robbed for that choice. I remember that Rogers would charge iPhone users $30 for 6 GB of data and charge BlackBerry users $30 for 1 GB of data. WTF?!? Are they serious that they think we are so stupid not to see this? Data is data no matter how good or bad the compression is, 1 KB is 1 KB just because RIM found a way to compress 6 KB into 1 KB using the NOC why do we get 6x less data then an iPhone user for the same price? It is fine to give us plans that are 6x smaller because we dont require 6 GB of data but the price should reflect that also! Why are BlackBerry users not rewarded for choosing a device that makes traffic on the network lighter? I do get that there are NOC fees built into BlackBerry plans but why is it 6x more expensive?

    This is the kind of crap that blows my mind. Again data is data it’s just a matter that one device will use 6x more data then another one and that device will require a higher data plan. I think Carriers need to wake up and realize the strengths of pushing a lower bandwidth device like the BlackBerry and how it will save the consumer money. Oh wait…. I think i just hit the nail on the head, light bulb moment….. I guess that was the answer right there, carriers don’t want to save the consumer money unless they make a PR buck off it. Carriers love their money and any place they can make a buck off of someone else’s dime they will. So because RIM uses less data instead of the carrier passing that savings onto the consumer they pocket that profit, Stuff like this as a consumer just makes you feel like there should be a law that prevents any company from making more then a 100% profit off a sold service. if it costs them 1cent to send a text message they can only mark it up to 2cents and must prove their costs to the governing body for these costs once a year.

    As a background we have over 60 users here in the office that use a BlackBerry device and all of them have 1 GB plans and I don’t remember 1 of them ever going over their data plan. We have a few iPhone users also and there are overages all the time. You tell me who the carriers want on their network plans….. the one that makes money in overages!

  • While speaking from the general consumer standpoint, I agree that it seems fishy not to just have generic data plans that don’t apply to specific devices. However, there are mitigating circumstances to all of the different packages. For example, many carriers offered packages that included “unlimited” data of certain types for BlackBerries (social media, email, as an example) but not for other devices. Why? Because this data could be routed via the BlackBerry NOC and at the time, cost less for the carriers than over their infrastructure. So BlackBerries had some better data plans than other phones for a while. Then the iPhone comes out and nothing about the iPhone is priced based on real costs, the whole economy of the iPhone is priced on perceived value. The marketing was different and the plans were different to reflect the consumers that bought BlackBerries. Now, did the availability of consumer-friendly data plans encourage more consumers to buy iPhones than BlackBerries thereby increasing the gulf between the BlackBerry user of old (business) and the new consumer? That’s a good discussion to have.

  •  hmmm.. maybe I was not clear enough.. a pipe is a pipe. Building wireless network from scratch is far cheaper than running copper which in the end far more ‘like’ a utility. My point was that Apple did what the operators should have done long ago = bolting continued value on top of that ether. Japan launched 3G in 2001, flat-rate data plans – Not Metered – a few years later (incld. messaging) and yet they still report highest voice/data arpu worldwide.

    It’s clear than certain devices and contents are extreme-signaling (*cough Angry B….), it should also be obvious that 30% rev. share for all products is going out the door, hence my comment on e-commerce etc. To be fair, there are obvious differences in land mass to cover and available subscriber base population, not too mention (don’t get me started) spectrum. That said, all are well-known realities and everyone has to play the cards they are dealt.

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