by Eric Norwood
October 10, 2009
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."