A new report by the Yankee Group, an independent technology research firm in Boston, Massachusetts, says that it takes seventeen months into the two-year iPhone service contract for AT&T to recover its expenses.
The report is called “The Golden Subsidy Egg’s Goose is Cooked: Welcome to the Brave New Subsidy-Free World,” and uses the Apple AT&T agreement as a prime example for unprofitable subsidy models. Cell phone subsidies are behind the “free phone” so many wireless carriers are willing to offer, and why Apple is able to sell iPhones for $199. The gimmick is meant to lure customers into lengthy cell phone contracts, where the carrier makes their money back over time. The report says that a cell phone subsidy, like the iPhone AT&T agreement, “adds tremendous cost to customer acquisition, limits plan flexibility, and creates a lengthy return on investment window.”
Some reports say that AT&T pays a $325 subsidy for the Apple iPhone. While AT&T is certainly attracting more business, their costs have also skyrocketed. Between 2006 and 2009 , wireless data use has increased by five-thousand percent.
According to the Yankee Group’s report, without the subsidy AT&T would break-even at the eight month mark. Andy Castonguay, author of the project, urges for the elimination of subsidies, saying:
“While subsidies have benefited many operators in the growth phases of their markets, the current state of the mobile market demands a swift change of direction. By strategically eliminating subsidies in cooperation with partner retailers, operators can quickly and effectively offload device costs that generate a significant portion of customer acquisition costs.”
This is true, however then you risk losing more and more customers going elsewhere for phones that the will buy and not from the carrier. You then have to, as a carrier offer all contracts either as one year or no contract, because why would I agree to a two year contract or any contract without a subsidy, from a consumer side it’s ridiculous. If they want to let me use the service when I want and just pop the sim out for t-mobile and then for att, fine, but then no contract should be required and pricing should be much lower and more features added into plans, see sprints plans.
Capt.
I don’t see how this would change anytime in the near future. I don’t think most consumers are willing, or smart enough, to start paying ~$500 on a phone up front. I say smart enough because if this was the norm then theoretically carrier plans would be ~$15-20 less every month. When a consumer gets a new phone with a subsidy it should be explained to them that they are agreeing to a loan with a fixed payment plan.
The uh oh I’m seeing is that we probably won’t get an early upgrade window this year for current iPhone owners.
Each of the last two releases, I’ve been able to upgrade at the 2-year contract price even though I was only 1 year into the contract. Now I see that AT&T is 5 months short of profitability and there are about 100 times as many iPhone owners as before. That means they stand to lose a fortune by letting us upgrade early.
That sucks.