Why Do Carriers Subsidize the iPhone?

Horace Dediu at Asymco used the data I compiled1 in “The Case for the Low-Cost iPhone” to further elucidate why carriers tolerate the iPhone’s industry-leading subsidies.

The presumption behind smartphone usage is that it leads to more browsing which leads to more network usage which in turn, leads to more network revenues and, finally, more network investment. If there is no additional browsing then there is a far smaller economic incentive to network operators to invest in infrastructure. It is this link between usage and revenues which I hypothesize drives operators to carry, subsidize and promote the iPhone. And the resilience of this link indicates that it still works.

The ASP data seems to support this hypothesis and so does the ARPU data. The more iOS is in relative use, the higher the network revenue per user. Correlation is not causation, but when combined with data about Android, we can also say that the presence of the primary iOS alternative does not lead to more revenue. In other words, if a lot of iOS is present then revenues are higher and if there is little iOS present then revenues are not higher.

This is true as far as it goes – critical, in fact – but I find it unsatisfying as a complete explanation for carrier behavior with regards to the iPhone.

Take three quick examples: Verizon, NTT DoCoMo, and China Mobile. If the iPhone as “Premium Network Services Salesman” is the only explanatory factor,2 then all three should have been clamoring for the iPhone from Day One. Yet Verizon resisted for years, and NTT DoCoMo and China Mobile have yet to give in. In fact, the iPhone has generally launched on the 2nd or 3rd-place carrier in any given geography.

My hypothesis is as follows:

  • The carriers see the iPhone as a strategic threat because Apple owns the customer relationship; the carrier is reduced to a utility. Therefore the leading carriers do not carry the iPhone
  • Customers strongly prefer the iPhone; in fact, they prefer it so much that they switch carriers to get the iPhone (something that is very difficult and rare). Second-and-third place carriers add the iPhone in order to steal customers from the leader
  • The leading carrier is forced to choose between losing the customer relationship to Apple or losing the customer completely

The fact that iPhone users are fabulously profitable makes this situation (and the associated subsidies) tolerable.

To put it in theoretical terms, the Bargaining Power of Buyers (i.e. wireless consumers) drives iPhone carrier adoption:

In 2010, Verizon acceded to the iPhone because customers were leaving for AT&T
In 2010, Verizon acceded to the iPhone because customers were leaving for AT&T — Ben Thompson

In this view, instead of carriers hiring the iPhone to attract high use/high revenue wireless buyers, the lack of iPhone repels wireless buyers and drives them to rival carriers, forcing the holdouts to give in to Apple’s demands.

UPDATE: Unsurprisingly, Dediu himself best made this case with respect to Verizon back in 2010. Worth a re-read.

  1. On top of his original data 

  2. To be fair, I am sure Dediu does not think it is the only explanatory factor either; I trust he’ll forgive the strawman