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Technology research and consulting firm, the Yankee Group warns that mobile service providers are losing profits because they use heavy subsidies to attract customers. If you don’t know what carrier subsidies are, then I’ll explain. Mobile phone carriers offer phones that usually cost $100 to $600, but they always offer a 2 year contract price. Basically, the carrier pays the manufacturer of the phone the majority of the price and you only pay a small fraction. The carriers do this because they have you locked into a contract and they will end up breaking even.

Well that is changing and the carrier subsidy model is becoming less and less profitable. The Yankee
Group says the iPhone is a prime example. Apparently, because of heavy data usage by most iPhone customers, iPhone contracts don’t break even until the 17th month of service. That is only one month before the customer is eligible to renew their contract and get yet another subsidized phone. That means that AT&T is making very little profit compared to before.

Now that I think about it, I don’t remember every spending more than $100 on a new phone. The original price was always $300-$400, but the carrier would cover most of it. I wonder what they will do to remedy this problem, because they need to. They can’t remove carrier subsidies because that will repel customers. They also can’t increase service plan fees because customers will start leaving. The only way seems to be cutting operating costs or somehow making deals with manufacturers.

[via Business Wire]


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