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AT&T needs 17 months to break even on iPhone contract

updated 03:50 pm EDT, Fri October 9, 2009

Carrier's profits thin, group says

North American phone carriers are far too dependent on subsidies, argues the Yankee Group. The research firm uses the particular example of the iPhone, which is said to turn only a small profit for AT&T. The carrier is able to lock customers into two-year contracts, but only after knocking several hundred dollars off the price of each phone. After also taking into account the impact of high data usage, the company is only breaking even on iPhones roughly 17 months into each contract. Yankee suggests that if AT&T were to eliminate subsidies, it could break even in eight months, and generate a 33 percent return over the course of two years.

Many carriers are said to be facing smaller profit margins in the shift towards smartphones, a result not only of subsidies but customer acquisition costs, exclusivity deals, and flat-rate pricing, as in the case of the iPhone's unlimited data. Retailers and phone makers may have to bear some burden in the future to keep prices down, Yankee concludes.

Apple is likely to resist any attempts to remove iPhone subsidies, as keeping pricing between $99 and $299 widens the potential audience. The company may however have plenty of room for closing its gross margin, which could be as high as 60 percent according to one analyst. Another suggests that the iPhone may be responsible for nearly all of Apple's September-quarter revenue growth.




by MacNN Staff

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Comments

  1. cmoney

    Joined: Dec 1969

    +3

    Are they taking into account

    the likelihood that fewer people will sign up if they get rid of the subsidies? Also, this is the business model that the carriers created, so why are they whining about it?

  1. gurman

    Joined: Dec 1969

    +2

    Hmm

    Maybe they could use some of that enhanced revenue stream to improve their inadequate network.

  1. bjojade

    Joined: Dec 1969

    +1

    No subsidies, no contract

    What would be the incentive to sign a long term contract then? No subsidies would give someone NO incentive to sign a long term contract. It makes it easier to jump ship to another carrier at will.

    And do you think people will be happy paying the same high monthly fee, but then ALSO having to buy a phone now too?

    Gotta love analysts. I bet they would advise that if you strip down the hardware in your product but kept the price the same that your margins would go up too.

  1. climacs

    Joined: Dec 1969

    +2

    there's no way

    I would have bought an iPhone if I'd had to pay $500 for it. I suspect a lot of others would say the same.

  1. jstephe

    Joined: Dec 1969

    +1

    How come

    If there are no subsidies how can it take 8 months to break even no subsidies should mean break even in the first month.

  1. b9robot

    Joined: Dec 1969

    -1

    AT&T doesn't need anything, there raking it in!

    17 more months to break even, I seriously doubt it! There raking it in with record profits!
    With no subsidies people wouldn't buy the iPhone or any phone for that matter. Certainly not if they also had to be stuck with a 2 year contract.
    What is this person talking about? The iPhone is the fastest selling smart phone, if AT&T isn't making money on it, then there's something really wrong.

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