Are Smartphone Profits Cannibalizing Service Provider Revenues?

By Gary Kim May 04, 2012
Among mobile phone manufacturers that are public companies and report mobile phone divisional performance, Apple earned 73 percent of operating profits, Samsung 26 percent and HTC one percent, according to Asymco. That’s one element of two that are significant in the “new” mobile phone market, namely Apple’s complete dominance of industry profits. 
The other significant finding is the amount of money end users now are spending on mobile devices. To be sure, as penetration has climbed up to 100 percent or more, more devices are going to be sold.
That increase in gross revenue potentially could grow profits as well. A total of eight industry suppliers generated profits of $5.3 billion in the first quarter of 2010. In the first quarter of 2012 they generated $14.4 billion.
 If you assume discretionary consumer spending is finite, and not growing, then consumers have shifted consumption away from something else to spend more on smartphones. Some might claim that shift is from the pockets of mobile service providers.
 That assertion cannot be tested. Mobile service provider revenues have risen since 2010, as well. In the one year between 2010 and 2011, U.S. mobile service provider data services revenue grew from $55.6 billion to $73.6 billion, representing growth of $18 billion, according to the Telecommunications Industry Association.
 Recall that eight handset manufacturers grew revenue by about $9 billion over a two-year period between 2010 and 2012.
Though it’s always possible to argue, in the abstract, that profits earned by Apple or Samsung “might” have been earned by service providers, the assertion cannot be tested. Device subsidies do lower service provider operating margin. 
On the other hand, end users ultimately pay the full cost of those subsidized devices. Also, it is those new smart phones that drive demand for mobile broadband, and mobile broadband revenue. It seems more logical to argue that Apple and other smart phone suppliers are creating a new market that likely is taking more consumer share of spending from other pursuits and products.
 It doesn’t appear that overall spending on entertainment video services has declined. Spending on big-screen TVs might be down. Tablets might be taking some incremental spending from PCs. But smartphones might also be taking some incremental spending that might otherwise have gone to MP3 players, mobile gaming or game consoles. In truth, those sorts of shifts are slight enough and diffuse enough that it isn’t possible to attribute specific losses to shifted spending on smartphones.
 It also is true that content, advertising and commerce revenues based on consumer use of smartphones have grown. Strategy Analytics expects $138 billion in smartphone related spending in 2012 on apps, games, audio and video and mobile broadband access. 
As much as $83 billion of that $138 billion will be earned by mobile service providers in the form of data plans, though. 
Based on all that, it is hard to argue that smartphone manufacturer profits have come “at the expense of” service providers.

Edited by Brooke Neuman

Contributing Editor

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