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Why carriers have a love-hate relationship with the iPhone

While consumers love the iPhone, wireless carriers have a more ambivalent relationship with the device because of the handset's high cost and need to subsidize the cost for subscribers. 

Although much has been made of the cost to AT&T, Verizon and Sprint of offering the iPhone, the fact remains that it is still a cash cow for these carriers. Not only does the iPhone help these companies attract new customers, it also ties them to lucrative two-year contracts.

?This is a phone carriers can?t live with it because it is the highest subsidized phone they buy and they can?t live without it because they actually make a lot of money on iPhone users, who have to buy data plans and voice plans and many also buy auxiliary plans,? said Carl Howe, vice president of consumer research at Yankee Group, Boston.

The big attraction
About 25 percent of all smartphones sold to carriers in the United States were iPhones, according to a new report from Yankee Group. Apple saw its already strong iPhone sales pick up in the later part last year following the release of the new iPhone 4S.

AT&T sold approximately 50 percent of all the iPhones in the U.S. last year, which means it is seeing the biggest impact from the high cost of iPhones, per Yankee Group.

In comparison, Verizon sold very close to the same number of Android smartphones with a much lower cost to carriers.

?Carriers are stuck between a rock and a hard place with the iPhone,? said Kaitlyn Lewis, an analyst at Yankee Group.

?Verizon probably pays less in subsidies so that its smartphone business is more profitable,? she said. ?However, Android phones do not get customers to switch carriers like the iPhone does, so Verizon is selling to its installed based, trying to get them to upgrade from feature phones.?

The bigger problem
It is this ability to attract new customers that makes the iPhone so appealing for carriers.

In its most recently quarterly financial earnings report, Sprint said that it sold 1.8 million iPhones, with 40 percent of iPhones in the quarter to new customers.

However, Sprint has guaranteed Apple $15.5 billion over the next four years for the right to sell Apple products.

?The iPhone helped Sprint bring in a lot of subscribers ? we saw that in its performance for the fourth quarter,? said Wayne Lam, senior analyst for IHS, El Segundo, CA . ?Of the top four carriers, T-Mobile, which does not have the iPhone, was the only one that actually lost subscribers.

?The iPhone is a double-edged sword ? it creates a huge pull but it costs so much more than any other phone out there,? he said.

In fact, the lack of an iPhone appears to be a bigger problem than the high cost of the devices for carriers.

?T-Mobile needs to build up its subscribers and the only way to do that is to give them what they want, which is the iPhone,? Mr. Lam said. ?If they keep losing subscribers in about two years they will have lost everybody.?

Long-term gains
The average selling price for the iPhone is over $600, according to Apple?s financial reports.

The reason Apple is able to command such a high price is because consumers are so eager to get their hands on the latest and greatest iPhone.

Attracting consumers is not the only benefit of carrying the iPhone for carriers.

?By most calculations the cost of an iPhone is at least 40 percent to 50 percent more than carriers pay for high-end smartphones from Samsung and others,? Mr. Lam said.

?The financial burden is noticeable but there is a calculated benefit in the long run because the carriers see each subscriber as guaranteeing some long-term revenue for them over the course of the contract,? he said.

?They should be able to make up the extra cost for subsidizing the phone.?

One reason why the iPhone is able to command such a high price from carriers is that no one else has come out with an alternative that has drummed up the same kind of excitement from consumers.

?It is all about user experience and iOS really provides that seamless and polished, intuitive user experience that makes the differentiation very stark relative to all the other platforms out there,? Mr. Lam said.

Final Take
Chantal Tode is associate editor on Mobile Marketer, New York