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Mobile carriers hate not having iPhone, pay premiums to get it

A flurry of reports have insinuated that the larger upfront subsidies carriers pay to gain access to the iPhone are "not good for wireless carriers," with one blog claiming "carriers hate the iPhone," despite facts indicating the opposite.

The seed report behind these claims originated with CNNMoney, which ran a story today claiming "the iPhone is a nightmare for carriers," explaining that "The iPhone may be great for consumers, but takes a nasty toll on wireless carriers' bottom line."

"Nasty bottom line" visible in iPhone launch quarters

It recounted how Verizon earned margins of 46.4 percent per quarter in 2009 and 2010, which dropped to 43.7 percent when the US carrier began selling iPhones last spring and subsequently "plunged" to 42.2 percent after signing contracts for 4.2 million iPhones in final quarter of last year.

It noted Verizon's margins jumped up to 47.8 percent in the third calendar quarter, a period of delayed iPhone sales that gave the carrier a greater mix of higher margin alternative smartphones.

The report noted even greater horror for AT&T and Sprint; the former's margins dropped from 37.6 to 28.7 percent over the past year, while the latter's margins dropped from 16 percent to 9.5 percent during its iPhone launch.

Jumping to conclusions

CNNMoney writer David Goldman cited Mike McCormack, an analyst at Nomura Securities as stating, "a logical conclusion is that the iPhone is not good for wireless carriers!"

McCormack added, "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 primary reason for this is the industry leading subsidy that Apple demands from carriers, about $450. But Apple also regularly asks for large volume sales commitments from its carrier partners and cuts into the carriers' efforts to push adware or other bundled services onto new devices, sell apps and media, and manage subscribers' phone support.

Ask the carrier, not the analyst

With all the muscle Apple is flexing in its negotiating efforts with mobile carriers, Sprint has estimated that "the cost of adding an iPhone customer is about 40% higher than the cost for the average non-iPhone customer," according to the report.

And yet Sprint's chief executive Dan Hesse said that he expects, eventually, that Apple's iPhone will be "our most-profitable device." The report also referenced an interview with Hesse from last October when the company was new to selling iPhones.

At the time, Hesse reported that the primary reason customers gave for leaving Sprint prior to October was because it had no iPhone. T-Mobile similarly reported that its lack of the iPhone was the primary culprit for its inability to attract and retain customers.

Hesse stated, "It comes down to, 'Do you want to be with them or bet against them?' Apple is arguably the best global brand in the tech space."

So rather than "hating" iPhone as a nightmare, carriers actually dream about the prospects of selling it. The upfront lower margins in launch quarters are won back over the two year terms of users' contracts.

Who pays for iPhone subsidies?

CNNMoney noted that "carriers have been gradually hiking prices," as well as canceling unlimited data plans and discontinuing older subsidy promotions like Verizon's "New Every Two" program.

"Apple isn't the only factor, of course," the report backtracks, noting that carriers are also investing billions to build out expensive LTE networks that are not yet attracting huge volumes of customers. Verizon has consistently reported having sold more iPhones than 4G LTE handsets.

Some of the infrastructure and premium iPhone subsidy costs are being passed along into the price tag of high end Android phones, which a minority of fans will buy regardless of their price. In many cases, those phones are at least $100 more than comparable iPhone models.

Those 4G Android users are also working out the bugs, preparing for a better experience once LTE chipsets are optimized and Apple beings adding the feature to its own wireless devices.

Who failed to anticipate the future revenues on contract sales?

Which brings the story back to its source: Nomura Securities. Is the firm encouraging carriers to abandon the iPhone and rely on alternative products that have less clout to demand higher subsidies for buyers? That was Verizon's strategy in 2010, but it didn't work well to attract and retain buyers or Verizon wouldn't have switched to Apple by the end of the year.

Nomura previously generated headlines in 2008 after claiming that Apple's recently launched iPhone 3G suffered reception problems related to an "immature" chipset solution from Infineon and stating it would be "unlikely that Apple can rectify the issue through software updates," suggesting a massive recall would be needed.

This wasn't the first time this had happened however; Nomura analyst Richard Windsor had also published a research note in the fall of 2007 suggesting that the original iPhone would likely suffer problems due to a faulty industrial design using “a chemical deposition to provide touch sensitivity based on heat,” and said Apple might have to recall millions of faulty units. But the iPhone didn't ever use touch sensitivity based on heat.

Keep in mind that Nomura also expects "Apple's tablet market share gains to peak around fiscal 2012-13, with Google and Microsoft 'emerging as powers in the tablet OS market.'" The firm specifically added that "despite softening demand for personal computers and netbooks, PC OEMs are proving to be in a stronger position than smartphone makers to capitalise on tablet sector growth."