Are Smartphones Worth the Cost to Carriers?

Before you go, we thought you'd like these...
Before you go close icon

The gospel in the wireless industry the past few years has been that increasing smartphone penetration will deliver immediate and significant benefits to carriers: higher ARPUs and stickier customers.

However, in a research note entitled "The Dark Side of Smartphones," Credit Suisse analyst Jonathan Chaplin challenges that conventional wisdom. Chaplin argues that ARPU growth has been disappointing, smartphone-driven costs are rising faster than ARPU, pressuring margins, and capital expenditure requirements are rising, again due to smartphones.

Chaplin said three things need to happen for the smartphone situation to improve: competitive intensity needs to return to pre-Verizon (NYS: VZ) iPhone levels, carriers need more spectrum to blunt capex costs, and there needs to be industry consolidation.

Some carriers are clearly feeling the "dark side" effects of smartphones. For example, MetroPCS (NAS: PCS) said it will increase capex this year from a previous estimate of $700 million to $900 million to a new target of $900 million to $1 billion. On the company's earnings conference call, CEO Roger Linquist said, according to a SeekingAlpha transcript, that the increase is "primarily driven by an increase in capacity expenditures for future subscriber and data growth driven by the popularity of our Android handset offering." 

MetroPCS isn't the only carrier working to deal with an influx of smartphone users. AT&T (NYS: T) Mobility has around 50 percent smartphone penetration, Verizon expects to achieve that in the first quarter of 2012, and MetroPCS and Leap Wireless (NAS: LEAP) have around 25 percent penetration.  

But carriers have little choice but to take on the cost of smartphones. Voice is now more of a commodity, and it looks like SMS is trending that as well with the introduction of Apple's (NAS: AAPL) iMessage and Facebook's Messenger

While there will be smartphone subsidy costs and network capex costs to deal with in the near term, supporting smartphones will be worth it. Capex costs will likely flatten out over the next year or two, and smartphone prices will continue to drop.

"I'm not sure I agree that capex increases are driven by smartphones," RBC Capital Markets analyst Jonathan Atkin told me. "The 4G capex is to put in place the platform, but the amount of spectrum available for 4G is so plentiful at the moment that smartphone adoption rates shouldn't affect capex."

Carriers are going through substantial capital investments right now for LTE and other capacity upgrades, but will largely be done with intensive capital spending within the next year or two. Further, as carriers upgrade to LTE, that will alleviate network pressure on their legacy networks, something Pete Ritcher, senior vice president of AT&T Mobility and Consumer Markets, pointed out last week

Additionally, the overall cost of smartphones is bound to keep on dropping. Verizon Communications CFO Fran Shammo predicted as much last week, which he said will be due in large part from pricing pressure from Chinese vendors like Huawei and ZTE. "Over time, handset [costs] came down," he said. "You now can buy a handset for next to nothing on the feature phone side. So on the smartphone, it's going to follow the same ecosystem."

Recon Analytics analyst (and FierceWireless contributor) Roger Entner said several factors will contribute to dropping smartphone costs: screen sizes and resolution have topped out; memory prices will drop; and LTE chipsets will fall in price as volumes ramp up. He said he expects to see many smartphones sold during the holidays this year for $99, and that price to drop by another $20 to $30 for the holidays in 2012.

Smartphones, and the data plans carriers have tied to the devices, mean higher ARPUs. More and cheaper smartphones mean consumers will have access to a wider array of functions without taking a big hit in their wallet. ARPUs will eventually flatten out, but the cost to send a MB will decrease. The near-term costs in terms of subsidies and capex will be worth the long-term benefits.

"I don't think it's all that dark," Entner concluded. "I think that there's a lot more light than darkness. Like many consumer electronics things, it all has a happy ending."

This article originally published here. Get your wireless industry briefing here.

Related Stories:

At the time this article was published The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of AT&T and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners