The iPhone Is Killing Mobile Carriers
If the failed merger of AT&T and T-Mobile taught us anything, it's how our new smartphone-driven lifestyle is driving mobile carriers to resort to extreme measures in order to slow sinking profits caused by the high cost of pouring data into our pockets.
If the failed merger of AT&T and T-Mobile taught us anything, it's how our new smartphone-driven lifestyle is driving mobile carriers to resort to extreme measures in order to slow sinking profits caused by the high cost of pouring data into our pockets. It's hard to feel sorry for the companies that impose an estimated 4,090 percent markup on text messaging services -- very little data, very high price -- but the bottom line doesn't lie. The Wall Street Journal's Anton Troianovski pulled some numbers on Wednesday that quantify the race for wireless carriers to acquire rights to the airwaves that will help them deal with the more data-intensive requirements of smartphone applications: the web surfing, the email reading, the Spotify streaming and, yes, the YouTube watching. Troianovski explains that the wireless industry as a whole spent $24.9 billion in 2010 alone to invest in infrastructure that supports more data traffic. The T-Mobile deal had a symbolic purpose, he argues:
In trying to buy T-Mobile, AT&T bet that government officials would see the wireless industry's difficulties amid the smartphone boom as a justification for allowing the second-largest industry player to buy the No. 4 player. Regulators didn't see it that way.
No, they didn't, and wireless customers didn't seem to appreciate AT&T's attempts to monopolize the mobile phone business. (Remember, this is Ma Bell's favorite grandson we're talking about here.) Though you might not agree with the principles behind the AT&T-T-Mobile deal, it's a little bit easier to sympathize with the idea that Apple grabbed mobile carriers by the shorthairs when it decided to launch the iPhone under its own terms. AT&T was the first to carry the iPhone, winning over fanboy customers but also sending its data infrastructure costs through the roof. And it's only getting worse. One analyst cited in WSJ's coverage of the trend estimates that AT&T's profit margins will dip from 44 percent to 30 percent in the fourth quarter of this year. (That same analyst called the ascent of the iPhone "a wealth transfer from AT&T shareholders to Apple shareholders.") Troianovski continues:
Wall Street analysts have projected AT&T's wireless profit margins in the fourth quarter will be the worst in at least four years, despite AT&T saying it would sell more smartphones--including the iPhone 4S--than any other quarter. That's because every time a new iPhone model comes out, it's the carriers--not consumers--that shell out the biggest bucks. Analysts estimate that carriers pay Apple a subsidy of about $400 each time a consumer buys an iPhone with a two-year contract.
While you might have a hard time feeling sorry for AT&T, don't forget that T-Mobile stood to gain from the deal as well. And now that AT&T's caved to pressure from regulators not to eat such a big piece of America's wireless pie, the German underdog might be in trouble, too. The New York Times's Jenna Wortham and Brian X. Chen report that T-Mobile and the analysts that trade its stock are supremely worried about the company's future now that they have to compete with Verizon, Sprint and, of course, its once aspiring sugar mama AT&T. "There’s no Plan B," T-Mobile parent company Deutsche Telekom's spokesman Andreas Fuchs told Wortham and Chen. "We’re back at the starting point."
So where does that leave the other two of the top four, Verizon and Sprint? So far, in pretty good shape. Verizon, another company that was formed by the breakup of Ma Bell in the late 20th century, is undeniably huge, and while it's certainly adjusting the cost of doing mobile data, its business is much more diversified with a massive broadband subscriber base and a stronger network than AT&T. Sprint -- less an underdog than T-Mobile but an underdog nonetheless -- was thrilled about the implosion of the AT&T-T-Mobile deal. The talking point is surely one that will resonate with iPhone customers sick of shelling out $100 a month for slow download speeds and dropped calls. "From the beginning, Sprint has stood with consumers who spoke loudly and clearly that AT&T’s proposed takeover of T-Mobile would create an undeniable duopoly that would have resulted in higher prices, less innovation and fewer choices for the American consumer," Sprint said in a statement that WSJ's Shira Ovide called a "victory lap." The company added, "We look forward to competing fiercely in the robust, competitive market that exists today and continuing to deliver the world class service and products that consumers have come to expect from Sprint." This, from the company that just shelled out $15.5 billion in order to win the privilege of selling the iPhone.
Regardless of whether Sprint customers decide to buy the thing or not, Sprint will be making payments on that deal for years to come. Don't forget to make the check out to: "Apple Inc., Cupertino, California." That applies to the mobile carriers and you consumers, too.