iPhone subsidies damage operator profits

October 21, 2016

Subsidising the Apple iPhone to sell for just $200 has taken its toll on US network operator AT&T, with profit margins expected to drop significantly when it announces its third quarter results later this month.

Other US networks, including Verizon and Sprint, have also felt the pinch as they were forced to increase subsidies on high-end smartphones to compete with AT&T’s iPhone offering.

Before AT&T launched the iPhone, the company warned its shareholders that profit margins were likely to fall until 2018 because of the heavy subsidies needed to secure exclusive iPhone sales.

Subsidising handsets is widely practiced among mobile operators around the world.

Selling mobile phones for less than their market value is beneficial in the long-term, because it attracts more customers to a network, but can cause a significant dent in short term profits.

UBS analyst John Hodulik said although subsidies have always lowered profitability, heavy iPhone subsidies have scaled up the problem to a new level.

The credit crunch has also contributed to the slash in operator profits, with customers unwilling to splash out for additional services such as data and text bolt-ons.

Analysts predict that AT&T will be the hardest hit of the big three US carriers, with profit margins falling from 41.2% in the second quarter to 36.1%.

Verizon’s margins are expected to fall to 43.8% from 45%, and Sprint’s margins from 25.7% to 24.%.