Every new iPhone and upgrade puts the carriers in dilemma – Part 1

By now, it’s well understood that the iPhone is a double-edged sword for the wireless carriers. On one side, Apple’s smartphone is a pricey device to carry, requiring an unusually high subsidy that carriers must pay to keep it affordable enough for the masses. On the other, it leads to more loyal customers who pay more each month.

Furthermore, the telecom companies get to wrap themselves in the hip vibe that Apple brings to its products and partners, and can you put a price on being cool?

Apparently, you can, and it’s a steep one. The dilemma for the carriers is that with each successful quarter of iPhone sales, there is a corresponding hit to their profit as a result of the extra subsidies paid out, as illustrated by Verizon and AT&T’s fourth-quarter results. (Sprint Nextel hasn’t reported yet, but will likely see a similar impact.)

While the carriers have argued that the short-term hit will lead to longer-term gains, the desire for constant upgrades–and the subsidies that go with it–blunt any benefit they get in the long term. Customers who own iPhones aren’t just content with their current model; they will re-up as soon as possible. There lies the problem: a never-ending loop of subsidy payments that the carriers can’t get out of, largely because the iPhone has become so key to their growth.

“At this point, the iPhone is like a drug, and the carriers are hooked,” said Craig Moffett, an analyst at research firm Sanford C. Bernstein. “The question isn’t whether it’s worth it. It’s whether they can get by without it. ”

Moffett said he is concerned that while more people will use smartphones, there will really never be a any real rebound in profit from iPhone customers because of the constant upgrade cycle.

“Is the iPhone margin effect transitory, or is it a ‘new normal’?” Moffett said. “The fallacy is the idea that the iPhone upgrade cycle is a one-time event.”

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Posted by Usman Khalid on Jan 27 2012. Filed under Sci-Tech. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.