When High Smartphone Sales are a Problem, Not a Benefit

Mobile broadband revenue driven by the adoption of smartphones is now the primary revenue growth driver for mobile service providers in developed markets. So selling more smartphones is a good thing, right? Well, not always.

High-end phones, such as the Apple iPhone, most often are sold in the U.S. market as part of a bundle that includes a discounted device, and a two-year contract.

A fairly intense debate about the wisdom of large subsidies is certainly possible. In fact,

AT&T said its wireless profit will be reduced by higher than expected  sales of smartphones, such as the Apple iPhone, in the quarter.

The reason is that AT&T and other mobile service providers must subsidize end user purchases of such devices. And those subsidies put pressure on wireless profit margins.

AT&T said it sold 10.2 million smartphones in the quarter, which would imply sales of about 26.9 million for 2012, up from its December forecast for 26 million and about a million units above the 25 million AT&T had targeted for 2012 sales.

The financial implications have been clear for some time, as advanced devices have climbed significantly.

In fact, AT&T built its business model for 2012 around the idea that it would sell no more smartphones, overall, than it did in 2011, about 25 million units. Obviously, smartphones proved a million units more popular than that.

An analysis by BTIG illustrates the problem, namely that the subsidies imposed about a 10-percent drag on AT&T earnings in 2011.

For such reasons, there are growing experiments with sales of non-subsidized phones, though even proponents of such practices, such as T-Mobile USA, appear to have rediscovered that customers will not buy $600 to $800 devices outright. T-Mobile USA now offers installment plans for phone purchases, which still means T-Mobile USA still incurs device cost subsidies in another form.

And some service providers who had moved to a full “no subsidy” policy appear chastened, as unsubsidized phone prices seem to have depressed consumer willingness to buy smartphones and data services. So high smartphone sales are sometimes not such an unalloyed benefit for mobile service providers, compared to what people may have believed.