Make room in your budgets for increasing cell phone costs. Why? Because Apple has figured out a way to rule the world and whether or not you're under their spell, you will probably pay the price.
An article on CNN Money caught my eye today, The iPhone is a Nightmare for Carriers. Shocking headline right? How could the iPhone be a nightmare for anyone...it's only one of the greatest things ever created.
After reading the article, one thing really stood out to me: the power of a strong brand. We often talk about great brands...brands we see everyday, can recognize very easily, and even have developed loyalty to. But what Apple has done...or should I say, what Steve Jobs has done...is turned us into some pathetic salivating puppies who would do and give anything to get our paws on whatever it is they're selling. Talk. About. Genius. God rest his soul.
So the problem: Why is iPhone a nightmare for carriers? In the simplest terms, carriers aren't making money off of the iPhone. In fact they are losing money from offering it. Carriers pay the "sticker" price for each phone from Apple and they sell it to us at deep discount, after hundreds of dollars in rebates and the such. For most phones, this subsidy is recouped over the course of a 2 year phone contract but for the iPhone, the subsidy is so large that even with the contract, iPhones are bringing margins down. Fun fact of the day: Verizon saw one quarter of rising margins this year. When? Third quarter, when iPhone sales stalled due to the much anticipated release of the 4S. Go figure. Not to mention the added expenses of supporting these 3G and 4G compatible networks and expanding coverage areas. Now not only is AT&T seeing decreasing margins from offering the iPhone, Verizon and Sprint have joined the band wagon as well.
The Solution? You would think this means that carriers wouldn't support the iPhone. Sprint admitted to paying upfront costs of $15.5 billion over four years yet doesn't expect to make any money off of the iPhone until at least 2015. What business continues to sell something that makes it lose money? This is where the power of the brand comes into play. No. They aren't thinking about tossing Apple (no one would dare do such a thing). They aren't even considering negotiations with Apple to reduce the subsidy (which is running about $450 per phone). Instead, they are passing on the increased costs to consumers in the form of higher service plans and limits on otherwise unlimited offerings. Sprint has increased all smartphone rates by $10/ month. Verizon no longer offers unlimited data. AT&T no longer has an unlimited plan and raised rates by $5/month. This is for everybody. Non-iPhone users and #teamiPhone alike. Why do you ask? It's all in the name of market share.
Carriers don't think the iPhone love affair will end anytime soon. And I think they're right. Even if it tanks their margins, it increases their market share. The reality of it all is that everyone loves Apple and consumers will flock to the carriers who offer it...so whether or not it makes dollars, it makes sense. First time I've seen that cliche broken. Apple, you've done it again.
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