Wireless carriers have a love-hate relationship with smartphone subsidies. T-Mobile is making a risky move later this year when it ditches them altogether. The No. 4 domestic carrier is facing stiff competition in the postpaid market, in part because it has always lacked Apple Inc. (NASDAQ:AAPL)‘s iPhone in any official capacity.
As T-Mobile pursues its unsubsidized plan, the rest of the industry will be watching with bated breath to see how customers respond to the prospect of paying full retail price for smartphones, even if they can obtain financing to do so. Spanish carriers have already showed T-Mobile of what kind of pain may be in store, since their own attempts proved to be a disaster. Two months ago, Verizon Communications Inc. (NYSE:VZ) CEO Lowell McAdam expressed interest in ditching subsidies, but acknowledged that consumers aren’t ready to give them up.
At the Deutsche Bank 2013 Media, Internet, & Telecom Conference, Verizon Communications Inc. (NYSE:VZ) CFO Fran Shammo said that he believes smartphone subsidies will decline in the coming years as competition heats up. While the platform landscape continues to currently be dominated by iOS and Google Inc (NASDAQ:GOOG) Android, Shammo sees rivalry from Microsoft Corporation (NASDAQ:MSFT) Windows Phone and Research In Motion Ltd (NASDAQ: BBRY) 10 putting downward pressure on subsidies. Shammo added, “I’m a believer that over the next two to three years subsidies will start to decrease just because of the ecosystems.”
According to Kantar Worldpanel ComTech’s most recent estimates, over 95% of smartphone sales in the U.S. are either iOS or Android. Verizon has a vested interest in seeing that combined figure decline, with the hopes that subsidies will fall along with it.
Additionally, Shammo sees voice-over-LTE as another catalyst for subsidy deterioration, as devices will technically be able to remove the CDMA chips inside and reduce component costs. Big Red is planning on rolling out VoLTE later this year. That doesn’t mean that Verizon’s 3G CDMA network is going anywhere, though, as the carrier previously said it was aiming for 2021 as a possible retirement date for its 2G and 3G networks. But as newer devices shift toward VoLTE, that could affect its ongoing subsidy costs.
However, one challenge that I see Verizon Communications Inc. (NYSE:VZ) facing with this prediction is that the rest of the world simply isn’t anywhere near that stage in the game. Outside of the U.S., LTE networks are either nonexistent or in their infancy. Verizon Communications Inc. (NYSE:VZ) is well ahead of the pack with its LTE network in the U.S., which now covers 480 markets, but the fact remains that smartphone vendors highly prefer to build devices with broad global compatibility whenever possible.
In order for a subsidy reduction to materialize due to VoLTE, Verizon will need to convince (or require) OEMs to build devices specifically tailored for its network and lacking older CDMA chips, while manufacturers will still need to build devices with CDMA chips for other networks around the world. As mobile gatekeepers, wireless carriers get a lot of leverage and it’s still feasible that Verizon could demand this of any vendor wanting access to its top-dog subscriber base. Just don’t expect OEMs to be happy about it, as they universally despise device exclusivity.