Wireless carriers continue to battle phone subsidies

Wireless carriers continue to battle phone subsidies

Wireless carriers have traditionally made money off lengthy two-year service agreements, rather than physical device sales. In the age of smartphones, however, carriers are footing the bill for expensive handsets that result in smaller margins, while phone makers such as Apple reap the benefits. To combat traditional phone subsidies, carriers in the U.S. have continued to raise monthly rates and employ new and higher fees. In Europe, service providers are taking more aggressive measures, with some carriers refusing to subsidize devices for new customers. The carriers’ latest cries of resistance are drawing applause from investors and analysts alike, who say carriers could benefit more from the smartphone boom if they raise contract prices and slow the rate at which customers buy new phones.

“Optimism has increased that we are witnessing the leading edge of a more disciplined, and more profitable, future,” Craig Moffett, a telecom analyst at Bernstein Research, wrote in a research note obtained by The Wall Street Journal. The analyst went on to question the difficulty carriers face when increasing prices due to “increased discipline and pricing power.”

Spain’s two largest wireless service providers, Telefonica and Vodaphone, no longer offer phone subsidies to new customers. The carriers are eventually hoping to retain customers, however, and then continue to offer phone discounts to existing subscribers who are looking upgraded their devices. Telefonica allows users to either pay nearly $800 for new smartphone, or sign up for an installment plan that adds 18 monthly payments of about $45 to their bills. The change in policy has resulted in 25% reduced spending on device subsidies.

Verizon Wireless chief executive officer Lowell McAdam previously mentioned Telefonica’s installment-plan and said the nation’s largest carrier may follow. “We’ll probably offer some things like that, and then we’ll see what the adoption is like,” the executive said. “You can’t push this on customers before customers are ready for it”

Wall Street has taken notice of the carrier’s concerns, and shares of Apple recently plummeted on concerns that carriers may soon squeeze iPhone subsidies. During the company’s earnings call, Apple CEO Tim Cook downplayed carrier subsidy concerns and told analysts that carriers will continue supporting the iPhone because carriers “want to provide what their customers want to buy.”

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