Subsidizing the 3G iPhone will undoubtedly hurt AT&T in the short term, costing the carrier about 10 to 12 cents per share off the top of its earnings this year and next year. AT&T's expected hit also illustrates how strong Apple's bargaining position was.
The release of the 3G iPhone has Apple (Nasdaq: AAPL) enthusiasts pumped up, but it left AT&T (NYSE: T) investors feeling deflated over the carrier's decision to heavily subsidize the new, cheaper device in the hopes of reaping longer-term gains.
AT&T's subsidies follow a well-worn path in the mobile phone industry, Gloria Barczak, a professor of marketing at Northeastern University in Boston, told MacNewsWorld.
AT&T's move falls in line with the industry standard to subsidize most cell phones, she said. "It also lowers the phone price to buyers, thereby expanding the base of users. Although customers are tied into a two-year contract, chances are that they will add services over time, increasing the revenues and profits to AT&T. The services are where the carriers make money, so it makes sense to lower the price of the phone to increase the number of users and the services they utilize."
The strategy is not unique to the cell phone world. In fact, it's a virtual version of the razor and razor blade model that was also adopted for printers -- with companies such as HP (NYSE: HPQ) selling printers for little or no profit and then making money on the ink cartridges, Barczak added.
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