Apple's iPhone Not Profitable for Carriers?
According to a research report released by Denmark's Strand Consult, the iPhone is not the profit-generating machine that people have made it out to be...that is, unless you're Apple. For carriers, however, gaining the exclusive rights to sell the iPhone isn't exactly a winning situation. The report says that the hidden costs of the phone, which include things like the subsidies and the revenue share Apple demands, have actually hurt rather than helped mobile operators' earnings.
iPhone: Bad-for-Business?
According to a Sunday article in The Guardian, the report states that the iPhone isn't all that it's cracked up to be, at least from the carriers' perspective. Because Apple requires carriers to pay subsidies and, in some markets they demand revenue share, the carriers don't make as much on phone sales as you may think.
"We have not found one operator which has created shareholder value with iPhone," notes the report.
Not only does the report state that the phone isn't as profitable for carriers as you may think, it argues that it might actually be a hindrance. "A lot of competitors are actually doing better," it says when referring to the carriers who don't offer the Apple device in their lineup. An earlier press release from the company even went so far as to claim that "operators that choose not to carry iPhone products have an increased probability of serving their shareholders interests."
Also mentioned is something called the "iPhone effect," a coin termed by a chairman of a multinational operator. "The iPhone effect is the effect that comes from moving our management's focus away from the 99% of our customers that generate the cash flow that pays our bills," claims the unnamed chairman.
In addition to these issues, Strand Consult also notes that the iPhone only attracts a limited market segment and one in which customers already were heavy data users...so they're not actually bringing in that much new revenue via their iPhone data plans. Meanwhile, flat rate data plans mean that the "high data consumption results in high production costs without the corresponding increased revenue."
Although not mentioned in the Guardian piece, we're currently seeing the problems AT&T has encountered here in the U.S. - thanks to it being the only network that provides the phone in this market. The company has struggled to provide coverage in heavily populated urban areas, like New York and San Francisco, where iPhone users are plenty. The issue went beyond just being hearsay to warranting a public shaming in a recent New York Times article. According to the article, the company has been working on expensive upgrades to those data-heavy networks to help ease the traffic burden which has led to dropped calls, slow speeds, and often a lack of signal. Problems like these have angered consumers and have given AT&T a bad name in many circles. The company has also had to delay the launch of new iPhone features like MMS and tethering, since their network again had to be prepared to handle the additional data traffic.
Some Carriers Disagree
While AT&T never directly commented on the report, they've been consistent in touting the positive benefits of the phone with every release of their quarterly earnings. For example, in their latest earnings announcement, AT&T revealed that the iPhone 3GS launch was the "best sales day" the company ever had. They also gained more than 2.4 million customers this past quarter, 35% who were new to AT&T. They noted that more than 80% of the upgrades were from a non-iPhone device or a 2G iPhone, increasing ARPU [average revenue per unit]. And as for the iPhone owners themselves, the company says their ARPUs are significantly above the company's post-paid average, churn is much lower, and recurring margins continue to be high.
Another carrier, U.K.-based O2, did comment on the report. They told the Guardian they disagree with the findings, saying that they've benefited from the so-called "iPhone effect." Although the article didn't go into specifics as to what those benefits are, it's likely they're seeing much of the same benefits as AT&T. Finally, according to Reuters, Japan's exclusive iPhone carrier, the #3-ranked in the country, passed the number one carrier in August in terms of new subscriber sign-ups.
Perhaps the truth here is in the middle. Maybe Strand is right in saying that carriers don't benefit from iPhone sales. However, they could benefit simply from having iPhone customers who stick with the company for long periods of time, paying for hefty data plans along the way.
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"according to a new research report"
New? That Strand Consult report is nine months old and wearing pretty thin. See here:
http://brainstormtech.blogs.fortune.cnn.com/2009/09/07/is-the-iphone-really-the-paris-hilton-of-mobile-phones/#more-10968
@Philip: They released a new report this month.
Sources: http://www.informationweek.com/news/personal_tech/iphone/showArticle.jhtml?articleID=219400287
http://tech.yahoo.com/news/nm/20090817/tc_nm/us_apple_operators
@Sarah
Same report but different headlines.
BTW no one is wiser whether the telcos are sharing revenue with Apple and no one is saying anything, Strand is just guessing because they know Apple is not going to reveal anything.
The major issue that the report misses is one of timing.
Apple's business case is simple - they receive all the cash at one and only recognize the revenue over the life of the contract (which is a very conservative approach and clearly designed to smooth out the surge of revenue they're seeing).
For the service provider, it's different. They have to pay Apple for the phone up front ( as well as making sure they have the bandwidth to handle data-hungry iPhone users), but recoup their revenue over the life of the phone.
Apple's cash is front loaded, so they're never cash poor on the deal. The service provider loses money for half of the contract and then make it up on the rest. So any time you look at a fixed time period, it looks worse for the service providers than it really is.
Really? I went from cell phone hostility and a minimal account, mainly for travel, for about $40/month. Now I have an iPhone with a $90/month ATT package. That is a common pattern, I think. People are wringing their hands about overloaded phone systems. ATT is rolling in iPhone money.
I have no Iphone but I really like the features of it. But what I observed is it lacks some features every model that it releases. Like the first Iphone, it lacks 3G capabilty where in its time it can be done. Well I think it is a marketing strategy.
colon cleanser
Apple gives exclusive license to only one carrier for the entire market. Supposedly the carrier is losing money on the deal.
It's hard to reconcile those two points.
I suspect that either as #4 states, the methodology of this report is fatally flawed, or it was commissioned by someone who hopes to gain by the conclusions of the report and the analysis was done to show what they wanted. Or maybe it's both of those things.
"Perhaps the truth here is in the middle."
Or perhaps the "report" is pure anti-iPhone propaganda. In other words, more BS to be churned by the Microsoft-controlled tech press to generate clicks and Apple hatred.
Denmark's Strand Consult claims to be a consultant only, that generates revenue by selling "reports". But they will let you D/L this BS for free!
Hey Strand Consult, why don't you tell us who paid for the BS, and how much you get from Microsoft each time you "release" the same BS with a new Headline.
AT&T makes money hand over fist with the iPhone.
For the 2 year contract, when the subsidy for the iPhone is factored in, AT&T makes over $70 a month for each iPhone sold.
Whilst I'd like the report to be true in the hope that it would lead to the iphone becoming more available on other networks, think the main carriers will be doing OK out of it too. In some cases eg O2 in the UK they have liked being able to gain some 'coolness' factor by co-branding with apple. And if AT&T is having a few issues now in terms of having to upgrade network capacity in some areas - it will end up in a better leading position versus other carriers for its data capacity.
"For the 2 year contract, when the subsidy for the iPhone is factored in, AT&T makes over $70 a month for each iPhone sold."
I wish people would refrain from commenting on things they don't understand.
AT&T doesn't make anywhere near that. They have enormous costs that need to be factored in. Building and maintaining infrastructure is horrendously expensive. Paying salaries for their tens of thousands of employees is expensive. And they have a lot of other costs.
While I believe that AT&T is making money from iPhones, it's only a tiny fraction of the amount you're suggesting.
It's the same game wireless carriers have been playing for years now. They give you a sizable discount on the phone for agreeing to a 2 year contract. They lose money (or make very little money) on the sale of the hardware but, as Joe Anonymous said, make up their cost and then some over the span of your contract (that's the whole purpose of the Early Termination Fee - so they can recover their cost if you back out). Honestly, why would anyone think this was any different for the iPhone? The only company making money off of it is Apple (between the hardware itself and all the apps the sell through the AppStore).
@ Philip Elmer-DeWitt,
I have seen your article and coments about our iPhone analysis. The research note we published in December, http://www.strandreports.com/sw3501.asp was a pre-study to our report which we published the 17th August – not 8 month ago. We have in the last 1½ years conducted many workshops for operators about mobile broadband and mobile broadband strategies, and have often spoken about the iPhone and had access to quite some information which is part of the report, and also information which we cannot publish!
We are still looking for an operator who can provide a positive iPhone effect in their financial statement! We haven’t seen any, still looking. The article in The Guardian correctly states that O2 does not agree with our conclusions, on the other side, they do NOT state they have a positive financial effect of the iPhone in their financial statements. I'm sorry but that sounds to me like they are agreeing.
Today the COO of TeliaSonera Kenneth Karlberg, at the Capital Market Day, said that the iPhone was NOT about making money, but addressing some segments which they normally had a hard time targeting, So for TeliaSonera it is about differentiation on the iPhone. Well that’s going to be hard when other operators in their markets now also have access to the iPhone!
A lot of people have a view on the iPhone and the iPhone effect, on the other hand, we collected numbers and benchmarked the different players against each others. I would recommend you to read the chapter on Apples distribution strategy and on MVNOs
If you have any more questions to our report, please feel free to call or write to me.
Best regards
John Strand
Carriers making money on the iPhone...?
lets say a carrier needs to pay Apple 600 $ for the iPhone... Now they sell this for 299$, they need to do marketing, ah and pay a dealer commission or Shop advance, plus the cost of produce minutes for the plan and data.
So (24 months X 80 $) + 299$ - 600$ - x$ (dealer commission/Shop advance) - y(Marketing & handset management) - 24 months Production cost (voice + data)
Methinks the iPhone effect is all in Apple's court yard.
Geez....this is all about short-term vs. long-term. Yes, the balance sheets are hurt in the short-term. But, in the long term the customers acquired with lower churn are *extremely* valuable commodities. These companies aren't really that stupid, it is tough to take the medicine at first, but in the long term the benefits to the balance sheet are there (or they wouldn't be in this game). This is similar to a life insurance company, if they have a great year selling insurance, their balance sheets take a beating because a large portion of the expenses are the administrative setup and first year sales commissions. However, as the policies age and accumulate more premiums, the profits emerge. If you focus any analysis like this only on the short-term, you make it looks like acquiring customers is bad for business. Come on Strand, if you want some credibility project out the value of these newly acquire customers over time, don't just focus on the balance sheet today.
In Canada, iPhone customers are locked into THREE YEAR contracts, given this guarantee period, the fact that a large percentage of users will not switch back, and that fact these new users have much larger monthly bills, it's not hard to see that companies can run the numbers on this to project improved profitability in the long term. Mr. Stand, if you're still looking for an operator saying it's positive, maybe you should adjust the question your asking to something that is worthwhile (and not misleading) instead of only looking at the short-term impact with your analysis.
Mr. Stands, what do you have to say about Rogers in Canada?
If anyone did a tiny bit of digging around, you'd easily find out that Strand Consult is actually a one-man band, Mister John Strand himself, who's a complete sham and a mobile industry joke.
He’s a hysterical pseudo-analyst who goes to all mobile industry events to scream his mind out at whoever wants to hear him. He shouted at Walt Mossberg interviewing Steve Ballmer at Mobile World Congress this year. Nothing he says is based on a shred of fact or evidence. He loves to bash the iPhone because he is being paid by Microsoft, Nokia, Samsung, Sony Ericsson, etc... I am amazed that
the Guardian and all those other news outlets base their articles on this crazy man’s lunatic report.
His report says that the iPhone has not profited a single carrier anywhere in the world, which is completely false. If you just Google it for a few seconds, there are quite a few carriers who have announced great profits thanks to the iPhone :
“AT&T's profits were up in the third quarter, thanks in large part to the popularity of the Apple iPhone 3G”
http://news.cnet.com/8301-1035_3-10072601-94.html
“iPhone Boosts AT&T's Revenue And Profits”
http://www.videsignline.com/news/201201970
“O2 reports a 10% rise in revenue, thanks to the iPhone”
http://www.t3.com/news/o2-reports-a-10-per-cent-rise-in-revenue-thanks-to-the-iphone?=38246
"Rush for iPhones lifts Optus profits"
http://www.theaustralian.news.com.au/business/story/0,28124,25925738-5018020,00.html
Have not found one operator which has created shareholder value with iPhone.
>>>> Even without a shareholder value, AT&T manages to provide services continuously and also improves its services as it promised.
Ah so Mr Strand is like Apple's David POGUE.... :-)
sorry to say, but I meet Mr Strand and a couple of his employes at the 3GSM, so a one mand band he aint.
AT&Ts profit were up (because of the iPhone) then explain why the other carriers Profit went up more?
O2 reports a 10% rise in revenue, thanks to the iPhone"
again O2 only grew more in subs than the other carriers in the UK, in ARPU and DATA they grew less than 3, Orange, T-Mobile.
dont mentioned Optus... they send out a profit warning because of iPhone subsidies.
Sory I don't have any idea on iPhone!
iPhone is not launched in India!
iPhone Sucks!
Give Me Thumbs Up!
In addition to these issues, Strand Consult also notes that the iPhone only attracts a limited market segment and one in which customers already were heavy data users...so they're not actually bringing in that much new revenue via their ...
@zato
Are you sure all their reports are free?
Also, are you sure their specific advice to telcos is free?
I can't really comment on other countries than Germany (where I live), but T-Mobile - the iPhone carrier - was really struggling to reach out to younger customers as most of them went with o2 which offered the best deals 2-3 years ago, causing a network effect (calls within o2 are free with most, even the cheap, plans).
Nowadays a lot of people have moved on to get an iPhone and the o2's dominance among the 18-28 y/o is fading. Conclusion: Even if the iPhone was costing T-Mobile money right now (which I doubt), it was definitely a success in terms of preventing o2 from building a monopoly among young heavy users with all the subsequent network effect.
Really? The phone companies are not making their usual landslide profits? I think not profiting, and profiting but not making a killing are 2 different things... I am positive that the phone companies are not LOOSING money on the phone so maybe it is about time that they share some of the profits with the developers of the products they use to profit off the FREE AIRWAVES they are using at the public's expense!