iPhone boom is short-term bust for wireless carriers

Apple Senior Vice President of Worldwide product marketing Phil Schiller announces the new iPhone 5 during an Apple special event at the Yerba Buena Center for the Arts on September 12, 2012 in San Francisco, Calif.

Stacey Vanek Smith: In case you missed the big launch, Apple's iPhone 5 was unveiled last night. It's 20 percent lighter and 18 percent thinner, and goes on sale next week. Fifty million iPhone 5s could get snapped up by the end of the year. And each one is a potential cash cow for the wireless carrier the iPhone customer chooses.

But the cell phone companies will have to spend money to make money, as Mitchell Hartman explains.


Mitchell Hartman: When I finally give in and upgrade to that sleek new iPhone 5 -- with its bigger screen and smarter Siri -- it’ll probably cost me $199.

But Apple could get as much as $600. A lot of the difference will be paid by my wireless carrier: AT&T. The carriers subsidize new smartphones, to encourage consumers to upgrade, and stay around.

That drives profits down, says Roger Cheng of CNET.

Roger Cheng: It’s a financial burden, a bittersweet pill, particularly in the near-term. You’ll see a lot of these companies post losses rather than profits.

But without fat subsidies, consumers might not trade up and pay for cool new wireless services, says analyst Will Stofega at IDC.

Will Stofega: Subsidies have a measurable effect on the adoption of new technology.

To make the subsidies back, the carriers lock you into a long-term contract, and up your data charges. Stofega says the industry would just as soon junk this system of ‘discount-now, gouge-you-later.’

Stofega: There’s no rational reason to do this. The reason is because everyone else does it. If one carrier says they’re not going to go out and subsidize anything anymore, their competitors are going to say, ‘OK, great, well, we’re just going to grab up all your customers.’

So for now, expect more sweet subsidies, and more charges down the road.

I’m Mitchell Hartman for Marketplace.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

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