Wireless Companies Move to Reduce Phone Subsidies, Increase Profits

In a new effort to increase profits, wireless carriers have now begun to scale back on subsidies that benefit phone manufacturers.  Both investors and analysts have widely supported this strategy.   Craig Moffett, telecom analyst at Bernstein Research, said, "Optimism has increased that we are witnessing the leading edge of a more disciplined, and more profitable future."

Generally, wireless carriers purchase handsets from the manufacturers at full price, and then pass them on to customers along with phone contracts at a discount.  Now, providers in the U.S. have increased fees in an effort to deter customers from upgrading.   Verizon, Sprint, and AT&T have all increased the amount of money paid for an upgrade in an effort to control the cost they pay for handsets from manufacturers.    

The new strategy seems to be working.  Sprint Nextel Corp., AT&T, and Verizon's revenue from contract customers has collectively increased by 6.2 percent from the first quarter of 2012.  Share prices for stock in AT&T and Verizon has increased by five percent.

In European markets, providers have taken harsher measures, including refusing to carry certain phones.  In Spain, customers of Vodafone and Telefonica who want an iPhone will no longer get a discounted rate, instead having to pay $800 dollars for the device or agree to pay in installments.  The move is estimated to reduce Telefonica's spending on subsidies by 25 percent.

While wireless providers are doing better, manufacturers may in turn be facing the prospect of lower profits.  Shares in Apple are down twelve percent from April.  Investors have worried that this reduction of subsidies means bad news for companies like Apple.  However Tim Cook, chief executive of the popular smartphone manufacturer was confident that wireless providers would keep carrying the iPhone, commenting that they would, "want to provide what their customers want to buy."