AT&T Inc (NYSE:T) – handset subsidies will bite the dust
AT&T Inc (NYSE:T) sees its consolidated margins for Q2 below the levels that they were at, a year ago. The company has cited customer additions and investments as reasons for its reduced wireless profit margins. T is expecting to add more wireless contract customers than it has a year ago. The company is promoting its wireless services in a big way and hopes to add around 500,000 wireless-contract customers in this quarter, which is above the 320,000 that it added in the same quarter, a year ago. The company reiterated its full-year revenue forecast and said that it will increase more than 2%, while the average analyst estimate was 1%.
Wireless companies tend to pay subsidies to smartphone manufacturers in order to reduce the upfront costs of the handsets to customers at the point of sale. An increase in smartphone sales could lead to a temporary dip in earnings in the quarter that the handsets were purchased. What carriers are able to secure in return is a two-year customer contract.
The discount factor
Though all of this is okay for the moment as far as a sales strategy is concerned, it is not a hidden fact that wireless companies are trying their level best to banish subsidies. Under normal circumstances, the customer pays an up-front discounted price for their handset and the rest of the cost is worked-off over two years which is the duration of the contract. This helps carriers in that they are able to lock-in customers on long-term deals. But the fact if the matter is that at the bottom-line, these same discounts are the real killers. This is truer with high-end handsets such as IPhones. Many carriers tend to slash upto $400 from the cost of the more expensive smartphones.
A mindset change
This is exactly why wireless companies have started looking for ways of ending subsidies altogether. What needs to be dealt with is the mindset of the customer.
What is interesting is that consumers do not have an issue with paying full-price for tablets, which are actually just large smartphones. They have similar features and the calling functionality. But for some reason, carriers have been discounting the smartphone prices forever. However, over the next 2-3 years, carriers might slowly start charging more for smartphones and prices will be raised gradually. But for now, AT&T Inc (NYSE:T) and most other carriers will continue with their subsidy strategy.