On the face of it the notion that a significant drop in smartphone sales means more money in AT&T’s giant collective pocket seems counter-intuitive, as clearly in this modern mobile age the smartphone (and the data it consumes) has become the lifeblood of the industry.
But in a strange market quirk, an 8 percent drop in smartphones sales in the telecommunication company’s second quarter has resulted in stronger than expected quarterly revenues. Strange as it may seem however, the answer to how a drop in smartphone sales actually increased AT&T’s overall revenue is not hard to find, it’s due to subsidies.
While certainly not enough for me to shed a tear for hard-done-by wireless carriers, AT&T, along with every carrier, pays subsidy fees to handset manufacturers for every phone they sell, and in the case of a popular phone like the iPhone, those subsidies would be enough to cripple most companies.
There’s a reason that not every wireless carrier in the country supports the iPhone, its because the profit margins on the device are razor thin. In fact, even established telecommunication mainstays like Sprint have struggled to find profitability with the country’s most popular single device, simply because of the price Apple charges to carry it.
In fact, the reality for every carrier offering the latest cutting edge mobile technology is that they take a financial hit on each device, losing money when each iPhone, for instance, is purchased, recouping the money through device usage over the course of a two or three year contract.
If you ever wondered why prepaid (no contract) devices or phones purchased in the middle of an existing contract are hundreds of dollars more expensive, its simply because they don’t qualify for a carrier subsidy, so in those cases you’re paying the actual price of the device.
For AT&T this strange financial conundrum allowed it to post stronger than expected revenues this past quarter, simply because the company’s profit margins are higher. You see, with the company’s smartphone sales dropping 8 percent, that’s thousands of device AT&T doesn’t have to subsidize, allowing the company some short term financial success in a mobile market where the payoff always seems to be a few years off.
Of course AT&T is well aware of how it makes money in the mobile market, which certainly explains why the nation’s second largest wireless carrier has all but stopped pushing smartphones, content with people not upgrading their devices and staying in their current contract. In fact, to encourage (hear force) people to stay with the company for the entire length of the contract, AT&T recently eliminated its early upgrade offering, which previously allowed customers to get a new phone before their previous contract expired.
In the end, coupled with pushing people towards capped or tiered data plans, the fact that companies like AT&T have seemingly convinced customers like us to stick with our current phones is simply yet another move that allows them to make more money off you and me.