Mobile phone carriers have a crappy record of strategic planning – the history of the industry is rife with massive overinvestment in services consumers didn’t actually want, partly redeemed by massive unanticipated revenue from accidents of technology (I’m looking at you, SMS!). I’ve explained elsewhere that inflation-adjusted carrier ROI is negative.
Even so, the latest news from the analysts is pretty mind-boggling. Remember all those carrier execs rhapsodizing about how iPhone is the awesomest invention since sex? Well, it seems Apple is sucking all the profits out of the carriers that went for it. That has interesting implications for the future. Like, what happens when the carriers decide they’re done being conned?
The story begins:
The price of Apple’s iconic smartphone is heavily discounted by carriers. Those subsidies almost single-handedly devastate profit margins for Verizon, AT&T and Sprint.
The money quote is probably this:
“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.”
Yeesh…”Value destruction”. The implication, which is backed up by the rest of the article, is that the iPhone is wreaking enough havoc on carrier margins to be seriously damaging. While this neatly explains Apple’s record quarter in 4Q2011, it also makes harder to understand why the carriers are standing still to be milked.
We know what the carriers think they’re buying – increased profits through increased market share. The problem with this theory is that it no longer makes any sense at all. Three of the four major carriers (AT&T, Verizon, Sprint) now carry the Apple product. How can the iPhone be a winning differentiator when almost all of your competitors have it too?
OK, so there might be a second level to the argument: each carrier might be thinking that if it doesn’t carry the iPhone it will have its marketshare eaten by others that do. The trouble with this theory is that Android is still growing userbase and marketshare faster than the iPhone. And though T-Mobile (the one carrier without iPhone) ain’t doing so well, nobody in the industry thinks lack of iPhone – as opposed to, say, weak execution and lack of the capital mass to pursue its buildout – is its problem.
From any carrier’s point of view, the case for dumping iPhone, or at least threatening to do so in order to renegotiate Apple’s subsidy requirement away, seems pretty open and shut. Apple has things all its own way right now – skimming the lion’s share of the profits off the carriers’ business without having to shoulder their risks. But this is an unstable situation, because the carriers’ investors won’t tolerate it indefinitely. What happens when they revolt?
That’s not hard to figure, actually. Best case, Apple is going to have to give up the carrier subsidies, taking a serious hit on volume and profits. Because the alternative is that one or more of the majors will stop carrying the iPhone entirely, which would be much worse. Likely Apple’s market share would actually drop noticeably if that happened. And that would be disastrous, because the other carriers would probably run for the exits.
The bottom line is that Apple’s current performance isn’t sustainable. The losses the carriers are presently eating on the iPhone are going to get squeezed out one way or another, almost certainly re-manifesting as significantly higher unit prices to the consumer. This, of course, will increase Android’s competitive advantage.