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