Wireless Carriers Seek New Strategies to Boost Phone Profits

When Verizon (NYSE:VZ) and AT&T (NYSE:T) said they had not met iPhone sales estimates in the last quarter, Apple (NASDAQ:AAPL) shrugged it off with ultra successful earnings of its own that had received a big boost from growing sales in other markets instead. But as smartphone sales continue to boom and companies like Apple, Samsung, and Google (NASDAQ:GOOG) corner all the profits, wireless carriers are beginning to realize they need a change in strategy.

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So, they’re starting to finally take steps to change around the system that has the carriers paying full price for phones, selling them to consumers on large subsidies, and then trying to make money off subscriptions from two-year contracts. According to analyst estimates, for an iPhone sold for $199 by a wireless carrier, its own expense can be as high $400, Wall Street Journal reports.

Now, while U.S. wireless companies begin raising monthly rates and charging higher fees for phone upgrades, those in Europe are experimenting with completely doing away with discounts for new customers.

AT&T raised some of its monthly data plans by $5, or 33%, earlier this year, while MetroPCS Communications (NYSE:PCS) followed it up by hiking its unlimited high-speed data plan to $70 from $60. Sprint (NYSE:S) had already raised smartphone data prices last year by $10 a month. The combined revenue from contract customers for Sprint, AT&T, and Verizon increased 6.2 percent in the first quarter of the year from a year earlier.

In addition, Verizon has added a $30 upgrade fee on new phones for existing customers, while both AT&T and Sprint have doubled their upgrade fees to $36. “It will have a meaningful impact on us in managing those handset costs,” AT&T chief financial officer John Stephens had said last month.

In Spain, meanwhile, top two carriers Telefónica SA (NYSE:TEF) and Vodafone (NASDAQ:VOD) have completely stopped subsidizing phones for new customers, who now have to pay almost $800 to get the device. While they do have a choice of paying up outright or taking an installment plan that typically adds monthly payments of about $45 to their bills, it is a huge and completely new expense for the user. Both companies still subsidize phone upgrades for existing customers, but Telefonica’s phone expenses are still expected to come down by 25 percent.

The No. 3 carrier, France Télécom SA’s (NYSE:FTE) Orange, has not followed and is hoping to cash in by winning customers over with subsidized phones. For that reason, carriers in the U.S. are seeing Spain as a test and are watching it closely to see how market shares might change.

“We’ll probably offer some things like that, and then we’ll see what the adoption is like,” Verizon chief executive Lowell McAdam told Wall Street Journal. “You can’t push this on customers before customers are ready for it.”

Analysts are excited about what they see as a more equitable distribution of profits. “Optimism has increased that we are witnessing the leading edge of a more disciplined, and more profitable, future,” Bernstein Research’s Craig Moffett wrote in a research note.

While the prospect of an end to subsidies had affected Apple shares negatively last month before blockbuster earnings put them back on track, company chief executive Tim Cook has tried to downplay the effect on iPhone sales by saying carriers will have to cater to customer demand.

It remains to be seen what happens next in this tug-of-war, but for consumers, the era of paying low prices for the latest gadget and often nothing for older models may be set to change for good.

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