Smartphone Sales are Both Positive and Negative for Service Providers

By Gary Kim August 07, 2012

As it sometimes happens in business, a firm’s greatest success can lead to its greatest challenges. Something of that sort is an issue for virtually all mobile service providers selling Apple iPhones.

On one hand, demand for iPhones drives smartphone adoption. On the other hand, it also drives churn, both for service providers unable to sell iPhones, as well as service providers who find more of their existing customers are switching iPhones.

With Apple charging about $620 for each iPhone, according to UBS, carriers have to offer a subsidy of about $420 in order to sell customers the device for just $200. That is significantly higher than the roughly $300 carriers pay to subsidize some high-end Android phones.

US Cellular’s second quarter 2012 financial results illustrate the problem. Results were “mixed,” said Mary N. Dillon, U.S. Cellular president and CEO, and those mixed results are largely a result of stronger smartphone adoption.

On the good side of the ledger, US Cellular saw a strong increase in postpaid gross customer additions, lead by smartphone sales.

Smartphones as a percent of total devices sold increased to 51.9 percent from 39.6 percent; smartphone customers increased to 36.8 percent of postpaid customers from 23.1 percent, she said.

But postpaid churn was high, which US Cellular somewhat oddly attributes to expanded iPhone distribution.

As other service providers also have found, Apple iPhones are the most expensive devices to sell, based on the size of the device subsidies. So, the more iPhones any service provider sells, the higher the hit to operating results.

US Cellular’s net loss on equipment for the quarter was $117 million, up $20 million from 2011, primarily as a result of increased smartphone sales and higher costs related to 4G LTE devices.

The average loss per device sold increased year-over-year due primarily to the shift in mix to smartphones, US Cellular says.

Operating cost will be impacted by the continuing shift in mix to smartphones and the continuing introduction of 4G LTE devices throughout the year, US Cellular said.

Oddly enough, then, some smartphone sales, namely of Apple iPhones, are a “problem” for service providers, as well as an opportunity.

Edited by Brooke Neuman

Contributing Editor

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