Don’t Tell Me They Can’t Give You a Free Phone

Customers keep asking us why the prices of the phones are so high. The carriers are continuing to complain that they are having to pay beau coup dollars for devices and subsidize the phones. This is the biggest overall reason they give to justify:

1. Phone cost to customers
2. Resale phone cost at non-subsidized prices
3. Early termination fees (ETFs)
4. Avoidance of loyalty credits

We want to give you some information for you to manage those statements made by the carriers. If you are armed with some data, it will help you in your negotiation.

Are those prices to carriers really so high?

Let’s consider that old wireless metric, CPGA (cost per gross add):

CPGA (Cost per Gross Add) – or what it costs the wireless carrier to add you as a customer recorded in per subscriber terms. Average CPGA across all carriers is $350-400 (this is the cost to acquire a new subscriber). This number covers ALL costs (yes, including the subsidized price of the device!) which includes commissions paid to agents/employees, (we’ll say it again) phone subsidies and marketing costs. So this means that if you get a free device, on average, the carrier is down $350 (per subscriber) when you sign up with them and they need to earn this back to become profitable.

Additionally the carriers want you to stay awhile to recoup more of these dollars (albeit without a new subsidized phone upgrade) but the longer you stay, the more they can make up on their CPGA.

Another author to corroborate these numbers is Paul Bedell in Wireless Crash Course. He also states that it costs 3 times more to win a new customer or earn a customer back in CPGA compared to existing customers. You can find his information here (http://books.google.com/books?id=s3LR9ZlSv-4C&pg=PA427&lpg=PA427&dq=cost+per+gross+add+wireless&source=bl&ots=r12_auLYSv&sig=5zh97AXfqmwB-lGXN2nU4No8A0c&hl=en&ei=s3XBTf5-1MC2B6WVlK4F&sa=X&oi=book_result&ct=result&resnum=2&ve ). Therefore if you are staying with anexisting carrier, they have less cost to keep you.

Let’s Keep in mind ARPU

Here are recent data points on ARPU for specific carriers.

• Sprint ARPU is $56 per subscriber
• ATT ARPU increased is $63.39 per subscriber
• Verizon wireless ARPU is $53.52 per subscriber

Now let’s do some math

CPGA = $375 (let’s give them the benefit of the doubt, on average)

ARPU= $57.63 per the above. We actually know that for business customers this will be higher due to more voice minutes used and a much higher penetration rate, so let’s say, $73 all in.

Average months to earn back CPGA: 5.1 months. This means that for the remaining almost 7 months, the carriers are earning after acquisition cost on you. The average customer upgrades the phone every 2 years, so for the carriers, they are earning profit on these majority of users for 19 of 24 months.

So by giving them 19 of 24 months of pure profit, please don’t tell us we can’t get free devices or other perks to keep loyal business customers who spend more and are more sticky than retail.

Additionally, check out this piece of data from Vlad Savav from Engadget, Verizon lost money in the last quarter despite increasing revenues…what??? Here’s a synopsis of this article: Verizon made a great profit last year but need to payout $3 billing in settlements (ahem!) but still looks great with a revenue number growing by 9.9% YEAR ON YEAR. Vlad says, “Our favorite nugget of info? The “cash expense per customer” per month number: $27.62, which presumably includes Droid subsidies and the like. How does that compare to what you’re giving VZW each month?”

The device manufacturers are not without responsibility

Why do manufacturers and carriers price their phones so high when it costs them way less to make them? According to a January 7th article from Alok Saboo:

• The Galaxy Tab costs about $215 to manufacture and sells for around $800 or more
• The 8GB iPod nano costs around $45, but sells for $149. The iPhone 4 costs around $190, but sells for well over $600 (unlocked version)
• The Apple iPhone 4 costs about $190 to make, yet without a contract it can cost you $600 or more
• The Droid Incredible on Verizon costs just about $170 to make, yet without contract it goes for about $600 also

These are not isolated examples, the huge margins among the latest gadgets is more of a rule than an exception, so part of the answer is that manufacturers can charge more for more demand for the newest whiz-bang technology. One retort: don’t purchase the absolute latest in technology, wait a few months until the demand decreases, the price goes down and then complete a phone upgrade program.

Finally, we’ll leave you with this link  for an overview of the current economics of the wireless industry. Enjoy!