iPhone and Carriers: How Long Can Apple Keep Its 'Stranglehold'?

NEWS ANALYSIS: Apple charges a premium for the iPhone, and carriers pay it because subscribers want it. While, ultimately, the deal is wildly lucrative for the carriers, many are eyeing Microsoft's Windows Phone as the leverage they need to put some space between them and Apple.

Apple sold more smartphones than any other device maker during the first quarter€”35 million to Samsung€™s 32 million and Nokia€™s 12 million, by IHS iSuppli€™s count. With this kind of success comes a unique kind of power.

The iPhone maker charges the carriers more per phone than Samsung and other manufacturers do for their smartphones, and, needing the iPhone, the carriers not only pay but swallow the cost instead of charging customers more for a device they pay more for. The carriers need the iPhone because subscribers want the iPhone. However, should the iPhone be priced higher than a comparable Android device? The fear is that subscribers might want it slightly less, which would be worse for the carriers€™ bottom lines than the current arrangement.

€œMany operators worldwide are stuck on a subsidy treadmill that they find very hard to get off,€ Neil Mawston, executive director of Wireless Device Strategies at Strategy Analytics, told eWEEK. €œEuropean operators reduced subsidies for prepaid phones in the early 2000s, while Japanese operators tweaked subsidies for postpaid phones in the late 2000s, and both changes led to slowdowns in handset volume growth.€

For now, said Mawston, the iPhone €œis a must-have, must-stock and must-subsidize device for operators like Sprint and others.€

Sprint, the latest of the top U.S. carriers to offer the iPhone, struggled in recent years, blaming its lack of an iPhone for the hundreds of thousands of customers that left it each quarter. During its most recent earnings announcement, April 25, Sprint€™s numbers proved its point. With the iPhone in its portfolio, it sold 1.5 million of them during the quarter, 44 percent to customers new to the network. (By contrast, only 21 percent of AT&T€™s first-quarter iPhone sales went to new customers.)

Still, the device raises new issues for Sprint. Bloomberg reported that the carrier is in discussions with equipment suppliers to get up to $3 billion in financing help. Plus, according to the report, €œSprint is coping with rising expenses that include a four-year $15.5 billion contract to sell the iPhone and $10 billion for network expansion over the next two years.€