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Equally important as the hubbub over T-Mobile finally getting its hands on Apple's (NASDAQ: AAPL ) iPhone was the announcement over the weekend it was finally ending the subsidies it pays on smartphones. Instead users will pay full freight for a handset, but will have the option of paying it off in installments or bringing their own device if they choose.
Wireless carriers have traditionally subsidized the cost of a new smartphone in exchange for locking in consumers to a two-year contract. And while the greater penetration has helped increase the average revenue per user for carriers as well as greater mobile data revenue, margins end up being compressed because of the subsidy's costs.
AT&T (NYSE: T ) said postpaid wireless subscriber ARPU grew 1.9% to $64.98 while its cost of sales grew 4.1%. Verizon (NYSE: VZ ) reported fourth-quarter average revenue per account -- a slightly different way of calculating the number, since multiple devices can share data -- jumped 6.6% to $146.80 while its cost of sales were up over 8%.
Since it's largely going it alone at the moment, T-Mobile is taking a risk that consumers will calculate the no-contract, unsubsidized program is better for them in the long run. But I don't think they'll do the math. They'll compare their upfront costs -- $650 for a new no-contract iPhone versus a tethered $199 subsidized handset -- and they'll choose the latter because they'll be laying out less cash.
Now the Fool's Evan Niu suggests T-Mobile is still sending a few bills Cupertino's way with its payment plan, which, if consumers choose that option, could make it the more attractive plan among the major carriers. But with iPhone 4 units still being given away for free and 4S models going for $99 with two-year contracts at retailers like Best Buy, paying for the phones -- even if they're slightly subsidized -- still might not be so attractive.
But a larger question might be on carriers' minds: Why should they subsidize cash-rich Apple at all, which reportedly sits on $40 billion in cash and short-term investments (or nearly $140 billion, if you include long-term investments), when they're taking a hit to their margins?
That's why over the short haul I think T-Mobile will take a hit for blazing this trail, but over time I see Verizon and Ma Bell coming around to its way of thinking. Eventually, highly subsidized smartphones will be a thing of the past.
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