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Mobilizing the Business and Business of Mobile

Will US carriers do away with handset subsidies?

with 2 comments

As we all know the US mobile handset market (and most markets worldwide too), is very heavily subsidized by the carriers. That is what allows us the consumer to buy a $500 phone for $199.  The carriers have a vested interest in subsidizing the handset, that’s what keeps the customers (both new and old) coming in and paying higher monthly fees. The handset makers too have an interest in getting their handsets out to the consumers cheaply as it impacts their bottom line directly. But all this is at a cost. In Q3 2008, AT&T had to take nearly $1 billion hit to its bottom line due to iPhone subsidies, and that is just for one phone. Surely, the execs at the carriers would be sorely tempted to get rid of these subsidies to improve their bottom line and also reduce the huge debt they carry (nearly 50 to 70% of their assets).

However, before they do, they need to look at the Japanese mobile industry. That should certainly give them a pause. In January 2007, Softbank introduced its ‘White Plan’ which did away with subsidies for the handset in exchange for lower monthly fees. The other two carriers, DoCoMo and KDDI quickly followed suit. Since then, the handset sales in Japan have been down nearly 30%, according to Jeita, the Japanese electronics association. The average handset lifetime has also increased to 3 years.

Also, the Japanese carriers already have a healthy source of revenue other than fees, namely the charges they collect for allowing users to charge their purchases to the phone. In US, there is already a move towards building an alternate source of revenue, namely the application stores for the smartphones. However, those are primarily owned by the handset maker, not the carriers. Carriers have been slow to adopt this strategy and have had limited success with the stores they have launched.

It has to be very tempting for the US carriers to follow suit as DoCoMo is reported to announce an increase in operating profit by 20% due to reduction in subsidies for the period April-Dec 2008. However, if the US carriers followed their Japanese brethren, I believe the handset sales will be down more than 30%, more likely around 44%.

AT&T grumbling about the $900 million subsidies in its conference calls and report was not just a CEO’s vent, it was a balloon floated to test the waters. While the market and  handset makers are not ready to see the subsidies go the way of dodo anytime soon, investors are chomping at the bit for that 10cents per share increase to their portfolio. There is a strong likelihood that US carriers will get rid of the subsidies, especially on the high-end phones in two to three years, if not sooner.

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Written by dvdand

January 27, 2009 at 8:20 am

2 Responses

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  1. Once all of the major manufacturers have iPhone level phones, the market will rapidly mature and innovation will slow. The technological need for upgraded product will be less as will demand. Replacing the phones prematurely is not free – the subsidies get passed back around indirectly. So yes, in the interest of consumer and economic efficiency, its time to unbundle. If manufacturers want to sell more phones they’ll discount them directly through their distribution channels. The networks will compete more directly on price and service. So cut the “cord” on the subsidies.

    Willy

    February 2, 2009 at 6:56 pm

    • Willy,
      I have to agree that in the interest of consumer and efficiency, the subsidies have to go. However, one thing I disagree is that iPhone be the ultimate benchmark for innovation. Sure, it has great UI and is market leader in innovation for now. But, it is not the ultimate handset. There is still a lot of room for innovation

      dvdand

      February 3, 2009 at 8:10 am


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