Are iPhones damaging MNO profitability? August 19, 2009
Posted by wirelessinformatics in Handsets, Mobile Operator.trackback
Could it really be that the only company profiting from the iPhone right now is Apple? According to research from Strand Consult, of all the mobile network operators who range the iPhone, not one has managed to increase market share, revenue or earnings as result of the including the handset ‘de jour’ in their line-up. In fact, Strand found evidence of several MNOs who had actually suffered as a result of the iPhone, reporting profit warnings as a result of the device.
In the US, AT&T cited iPhone subsidies as a contributing factor to a dip in OIBDA (Operating Income Before Depreciation And Amortization). SingTel, Southeast Asia’s largest phone firm, reported falling profits due to iPhone launches, saying the iPhone alone hurt operating profit margin by 3-4 percentage points. In Europe, TeliaSonera, the top operator in the Nordics, has launched the iPhone in all Nordic countries, but it has not helped it to boost market share or lift ARPU says Strand. TeliaSonera’s ARPU in Denmark has declined from 212 Danish crowns to 168 crowns over the last two years, twice the pace of ARPU fall from competitor Sonofon whose ARPU in first quarter was 205 crowns. In Sweden TeliaSonera has lost one percentage point of market share in two years, and its the lowest ARPU carrier among top firms, with ARPU falling to 179 Swedish crowns in the first quarter.
Why? Well, it’s much the same story as we reported here. The introduction of new technologies designed to stimulate ARPU (average revenue per user) is often accompanied by significant cost that can quickly cancel out subscriber profitability.
There are three main cost areas that impact new product / technology launches in this way.
1. Subscriber Acquisition & Subsidies: Outside of marketing and advertising, a principle cost lies
in subsidizing handsets. Subsidizing handsets is standard practice for many MNOs. It’s a practice that enables them to quickly gain market share, attract customers and seed the market with revenue generating technology at a price-point that the consumer’s can bear. It is, however, a costly strategy and one that puts subscriber profitability in the Red from day-one. No wonder then that many MNOs have increased their standard contract duration to 24 months in an attempt to claw-back this cost.
Sources at AT&T have suggested that without the acquisition costs associated with the iPhone 3GS, which it launched in June, its OIBDA service margin would have been 40 percent rather than the reported 38.3%.
Mobile Broadband services are also suffering in this way. Most USB broadband dongles are supplied free-of-charge and many MNOs even offer free laptops to entice customers.
2. Cost-to-Support: When a new handset and/or technology is launched to the market it’s not uncommon to see a spike in support traffic as end-users grapple with new features and functions or learn to navigate a new OS. Unfortunately, this comes at a cost. The cost of handling customer care and support calls has an immediate bearing on a subscriber’s profitability because, like the cost of subscriber acquisition, handset subsidies and network maintenance, it forms part of the cost of maintaining a subscriber on a network.
Technical support calls on smartphones such as the iPhone tend to be longer and more complex in nature than lower-end devices. It’s not unreasonable to assume that a single call to a tier-3 technical support agent has the potential to wipe-out an end-users profitability for that month.
Do Sprint’s actions make a little more sense now?
3. Infrastructure: Data-centric devices place enormous strain on legacy network infrastructure. The industry has undergone something of a transformation in recent years, shifting data billing from time-based to packet-based. The availability of ‘unlimited’ data bundles is prevalent and seen as a key selling point for MNOs keen to fill the gap left by dipping voice revenue. However, in reality unlimited mobile data means 500mb-1GB. An operator will use ‘unlimited’ as a strong advertising statement to attract users, knowing that 99% of them won’t even get near the fair use 500mb-1GB and that margins / network performance are protected. But iPhone users (and their peers) are a different breed. These devices live for data connectivity.
It’s a fact that the rise of mobile broadband and the popularity of smartphones has put significant strain on 3G networks. Estimates suggest that the iPhone and mobile broadband services (amongst other data factors) have caused data traffic on tier-one networks to grow at rates of 10% to 15% per month. AT&T Chief Executive Randall Stephenson told the Wall Street Journal earlier in the year that wireless operators aren’t prepared for the onslaught of data traffic coming from smartphones, and that the deluge is beginning to clog their networks.
As such, many MNOs are doing a lot to upgrade their networks as quickly as possible in order to accommodate demand. However, when MNOs see data traffic increasing they sometimes react in a less than favorable manner by capping usage or imposing punitive charges.
What this commentary is not suggesting is that the iPhone (and similar peer devices) are white elephants. We all accept that they are game-changing and have been a positive force in taking mobile data mainstream.
OK, the subsidy that AT&T pays for each iPhone totals about US$300 but their monthly tariff averages at US$70. Over the long-term, such devices can add significant incremental revenue and reinforce subscriber loyalty. The message is that costs can be managed in other areas to allow for any short-term damage imposed by acquisition costs.
For example, it is important that support lines are optimized in advance of new product launches to counter any spikes in traffic. Can subscribers be managed via more cost effective web-based selfcare channels instead of being connected to an expensive support agent?
Of course, as internal systems, processes and knowledge improve around new products so too will the cost-to-support. Significant profitability gains can be realized by mitigating the above-average support requirements of new products and any reduction in post-sale support costs will have an immediate positive uplift in profitability that will enable MNOs to maintain competitive pricing strategies.
Many commentators have expressed the view that Apple is like a religion, with Steve Jobs as the “pope”. (See recent Sunday Times article “that apple tried to block”).
Belief in religions requires faith, which necessarily entails a departure from rationality. It is widely presumed, especially among journalists or the “media folks” that this departure for Apple is either desirable or acceptable.
You might say that “Secular mobile operators” question that presumption, on the basis that they need to make profit.
Strand Consult asserts that the validity of any position must in some way be tested on the basis of reason and observation. Due to their lack of supporting evidence, and due to numerous pieces of information contradicting the financial benefits of iPhone to MNOs, and with known facts, we should probably accept that the “Apple religion” is negatively affecting MNO profitability.
The flipside is that it could be providing big benefits to the other operators by educating consumers, driving better devices out of Nokia et. al and demonstrating that the “open model” is not so bad after all….