AT&T Doubles Smartphone Upgrade Fee; Looking for iPhone Subsidy Relief

AT&T (NYSE:T) has hiked its activation fee on phone upgrades from $18 to $36 according to a memo issued to all AT&T store managers according to BGR. ^[1] This comes on the back of a rough quarter for AT&T as the company recorded a massive net loss of $6.7 billion despite record Apple (NASDAQ:AAPL) iPhone sales. Smartphones have turned into a double-edged sword for the U.S. wireless industry, with the top 3, Verizon (NYSE:VZ), AT&T and Sprint (NYSE:S) seeing their margins contract heavily as the smartphone boom takes over.

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Smartphone subsidies forcing AT&T’s hand

Saturation in the voice industry and the rise of data services has caused smartphones to increasingly figure into wireless carriers’ plans. The lure of the high data ARPU generating smartphone customer has also led the wireless industry to heavily subsidize these smartphones in order to drive their sales. For example, a basic iPhone 4S model costs around $650 for the carriers who then subsidize it heavily to sell for $199.

Although this strategy holds promise over the longer term, their margins are under pressure in the near-term. AT&T’s wireless operating margins fell to just over 15% this quarter from close to 30% last quarter while Verizon’s gross margins fell by almost 500 basis points sequentially. Sprint’s OIBDA margin was also down to under 11 percent, compared to 18.2 percent in the third quarter.

AT&T’s latest move shows that the company is starting to feel the heat of its huge subsidies. The failure of its attempt to acquire T-Mobile, which subsequently led to a $4.2 billion separation fee payout to T-Mobile, is also a likely factor. Also, the fact that users are also increasingly using cheaper Internet messaging options such as BBM as well as iMessage and moving away from the traditional high-margin SMSes could also have played its part. (see Smartphone Boom Means Data Will Get More Expensive as SMS Use Declines)

The fee hike will help AT&T cover a portion of the upfront subsidies it offers, as most of the smartphone sales are to existing customers who just upgrade their smartphone. AT&T sold 9.4 million smartphones last quarter, however it added only 717,000 postpaid customers during the period.

AT&T is not the only carrier to have hiked the upgrade fee. On September 9th, 2011, Sprint had doubled the fee it charges for the upgrade process from $18 to $36. Verizon also attempted to charge current customers a $2 “convenience charge” for paying their bills over the phone or through an online site. The ensuing consumer uproar forced the management to reverse their decision. While carriers are afraid to lower the subsidies on offer since that may have an adverse impact on their smartphone sales, it seems that they see it more prudent to increase the prices of the fringe services that they offer instead.

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1. AT&T doubles handset upgrade fee to $36, BGR.com, February 10th, 2011 [↩]