iPhone lowering margins for phone carriers

Although many traditionally think of cell phone carriers as huge conglomerate organizations intent on nickel-and-diming the consumer at every corner, one cannot forget about the heavy subsidies on phones that these companies take on in order to lure consumers to sign for longer term contracts. With the release of the new iPhone 3G, however, companies have actually started to eat into their profits to stay competitive in the fast-paced wireless market. According to analyst forecasts, AT&T's $200 iPhone offering has helped profits drop almost 5% from Q2 to Q3: the phone is selling faster than the company had expected, and that directly hurts their bottom line.

Not wanting to be outdone, Verizon and Sprint, second and third respectively in the US wireless market, also dropped rates on high-end smartphones, causing smaller, but still noticeable drops, in profitability, according to analysts. With the worsening economic conditions, carriers will be hard pressed to find ways to attract new customers without further hurting their bottom line. Some analysts think higher subsidies will be cut in favor of cuts to service fees, whereas others feel smartphone subsidies are still the best bet, as smartphones usually come attached with an additional data plan on top of the voice plan.

"I think we'll see average revenue per user (ARPU) decline but the real question will be to what degree," said Stanford Group analyst Michael Nelson, adding that as voice call prices have fallen, carriers have depended on data for ARPU growth.

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