Why carriers put up with high iPhone subsidy

I already opined on crazypants analysts predicting carriers would put the iPhone in its place because they reason Apple wields far too much power in the wireless industry.

Newsflash: we’ve been hearing for years that disgruntled carriers will drop iPhone subsidies and hurt Apple’s bottom line in the process.

Surprisingly enough, fear of customer-retention rates spiking if they did has so far outweighed concerns of their profits taking a short-term hit because fewer people could afford a non-subsidized iPhone.

The fact of the matter is, it’s never been about Apple or even industry politics for that matter. This is about a sought-after device with the proven ability to bring in new customers.

It’s simple: make the iPhone more pricier and expect customers to flee to another network that offers it subsidized…

Enter BMO Capital analyst Keith Bachmanm (via AllThingsD) who gets the kudos for stating the obvious:

We continue to believe carriers would lower iPhone subsidies if they collectively felt that competing devices would drive the same economics as iPhones.

So, the iPhone economics.

He’s talking about the iPhone’s ability to drive sales at the expense of competitors, as expressed by churn rate.

Sometimes called attrition rate, churn rate refers to the proportion of contractual customers or subscribers who leave a supplier during a given time period.

The lower the churn rate, the better for a carrier.

The iPhone used to be an AT&T exclusive in the United States and people were willing to break their contract and jump ship just to get the device, thereby significantly reducing AT&T’s churn rate.

Combined with industry-leading user satisfaction, AT&T’s iPhone customers were far less likely to switch to another carrier upon expiration of their contract. In fact, the vast majority were willing to put up with dropped calls, sluggish data rates and poor customer service just to be able to upgrade to the latest subsidized iPhone model.

It’s estimated that the iPhone carries some of the heftiest subsidies in the industry said to be about $200 higher than other manufacturers.

Clearly, the iPhone is not for everyone.

Look no further than Sprint Nextel.

The carrier coughed up $15.5 billion to land the iPhone, risking bankruptcy in the process.

Sprint CEO Dan Hesse was even forced to agree to a $3.25 million pay cut because shareholders were unhappy with him betting the farm on the expensive Apple deal.

Of course, market dynamics changed when the iPhone landed on the Verizon network and especially now that the handset is offered through a total of thirteen U.S. carriers.

Even if the carriers wanted change the subsidy terms, they can’t due to the exclusivity terms Apple put in their contracts.

Apple’s multiyear agreements with its carrier partners very likely prevent them from changing iPhone subsidy pricing. These deals are said to have most-favored-nation clauses, so that any reduction in subsidy offered to one carrier would have to be offered to the others.

And with Verizon and Sprint both newly locked into their contracts for some time, Apple has no cause whatsoever to even entertain the idea of a lower iPhone subsdidy.

Taking it all in, an iPhone customer is more profitable than an average smartphone subscriber, is more loyal and in it for the long term and less willing to change carrier to get whatever iPhone-killer others are offering.


Because five years later, we’re still waiting for that one phone to beat the iPhone.

Make sense?