US Cellular Rebuffs iPhone Advances

by Matt Klassen on November 7, 2011

It was one short year ago when US Cellular CEO Mary Dillon proclaimed her company’s desire to add Apple’s ridiculously popular iPhone to its line-up, but a lot can change in 365 days and now the country’s sixth largest wireless carrier is changing its tune.

For many smaller carriers the prospect of carrying the iPhone can be daunting. To wit, when Sprint reached a distribution agreement with Apple for the iPhone 4S there were dual concerns over the company’s ability to handle the network strain due to iPhone data use, and the financial strain due to Apple’s burdensome subsidy fees. While AT&T’s own well-publicized struggles with the iPhone have long surrounded the former network strain, it’s looking more and more like the latter subsidy fees are the real issue here.

Back to US Cellular, during the company’s Q3 earnings report late last week Dillon admitted that her company seriously considered adding the country’s most popular single mobile device to its smartphone catalogue, and while network strain was not an issue, quite simply Apple’s “terms were unacceptable from a risk and profitability standpoint.”

While the announcement that US Cellular would not be carrying the iPhone surely comes as surprise to some, particularly given the fact that other smaller regional carriers, notably C Spire (formerly Cellular South), have started carrying the new iPhone 4S, the fact is that the popularity of the iPhone actually puts it out of reach for many carriers on a tight budget.

You see, handset manufacturers like Apple profit off smartphones by reaching distribution agreements with carriers; agreements that see the carrier pay a subsidy to the manufacturer for every device sold.

On large networks like Verizon or AT&T it’s estimated that the subsidy for any particular smartphone is somewhere between $150 to $250, depending on whether it’s 3G or 4G. By comparison, when Sprint acquired distribution rights to the iPhone 4S, analysts estimated that the subsidy cost was much higher, somewhere in the neighbourhood of $400-$450.

When Apple signs distribution agreements it wants to make a profit, and with larger networks like AT&T and Verizon that profit is earned through volume, as both companies boast millions of subscribers. But when the smaller regional carriers want to get in on the iPhone action Apple needs to find another way to earn money, and that is usually through higher subsidies as fewer phones will be sold.

Even if device subsidies weren’t the issue, however, there are countless stipulations that Apple could have asked for in a disruption agreement, including income from iPhone contracts or demanding that the carrier increase its spectrum capacity or the reach of its network. While network expansion is something every carrier wants, doing it at the behest of a company that thinks its rules the mobile market is unlikely to sit well with many.

In the end, while there’s no indication of the particulars of what Apple demanded of US Cellular, clearly it was too much, and I for one applaud the company for taking a stand against the iPhone where so many others simply kowtowed to Apple’s demands.

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Written by: Matt Klassen. Follow by: RSS, Twitter, Facebook, or YouTube.

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