05 February 2012

Suicidal Cell Carriers

How long do you suppose an auto dealership would stay alive if they lost money selling cars and only made money on the service for those vehicles?  The health vitals of all three American cellular carriers is in question thanks to an Apple slice on the jugular for the mere privilege of selling an iPhone.  The only question is when Verizon, Sprint and AT&T will be smart enough to leave their cut of hardware sales and focus on their core competency instead.

This financial struggle is comic, actually.  Each carrier requires slightly different frequencies to work on their network which allowed them to sell phones that are tied to their network.  To further enhance their lock on customers they make you sign a multi-year contract when you buy a phone for a discount that is paid back through a higher monthly fee.  In Europe you can buy a higher priced phone from one store and pick any carrier you want and switch providers as often as you like.  In America you get a highly discounted phone but a much higher monthly service fee to pay for it with no ability to switch to a competitor without an expensive ETF (early termination fee).

The American mobile phone business essentially printed their own money.  Until Apple entered the game.

By forcing carriers to pay much higher prices for their hardware while forcing an extremely low selling price, Apple has forced carriers to ship the counterfeiting machine to Cupertino, California.  Apple is making hundreds of dollars profit on every iPhone sold while the carriers are losing nearly as much, even after the customer has fulfilled their two year contract.  The results are financial insanity:

Apple is breaking world records with a profit of over 13 billion dollars.
AT&T lost 4 billion to T-Mobile and 2.7 billion on the iPhone.
Verizon, arguably the best cell carrier on the market, suffers a 2 billion dollar loss.
While Sprint has yet to post their numbers, they are likely in the worst shape of the bunch.

Carriers are living in the happy land of yesteryear where they believe the profits will start pouring into their wallets any moment now.  AT&T is telling their investors that by stealing customers away from their rivals that profits will return any quarter now while hoping no one is smart enough to realize that this is lunacy.  Their thinking might make sense if their new minions were never to upgrade their pocket computers, but you would be hard pressed to point to a single  iPhone owner who does not want to upgrade the moment a new phone is released.

Apple robs not just carrier profits but any love they might receive, as well.  Customers never know that those high monthly service fees are there thanks to Apple's ruthless price scheme.  When an iPhone owner walks into an Apple store there is a smiling guy at the Genius Bar that will hand them a free iPhone if their screen a smudge on it - oh but those mean old carriers keep raising their monthly prices and capping data plans.  Carriers are evil!  Apple is a saint.  You can count the number of iPhone owners that hate Apple on one hand and the number of people that love cell carriers if you had to give up both hands to pay for your monthly cell phone bill.

What would happen if Apple suddenly released "iNetwork" that any iPhone could connect to thanks to a nation wide Wi-Fi network on top of cellular roaming?  The idea is not as far fetched as it sounds since Steve Jobs was researching exactly this before signing the original iPhone agreement with AT&T.  Even if their network was half as good, it is hard to imagine many iPhone owners who would not jump ship.  The moment Apple can find a way to destroy the entire cell phone universe that they will do so.

There is only one way out of this, carriers:  Stop selling hardware.

Adopt a model closer to what they do in Europe.  Sell full priced phones with no contract or give a low discount on a device with a two year commitment for the pleasure of having a customer locked in.  Then change your monthly service fee to match the fact that you are not subsidizing hardware anymore.  Yes, your customers will have to shell out more money up front but they will still walk through your door because you are (gasp!) lowering your monthly prices.  Not only will you keep signing up customers but you will be able to finally balance your books.  Oh, and suddenly cellular customers will know the true cost of the service versus the device so maybe someone will learn to love you.

Ha!  Just kidding about the "love" thing.  But at least you will not lie on the ground with a bloody iPhone in your hand.