Are smartphones worth the cost to carriers?





MetroPCS isn't the only carrier working to deal with an influx of smartphone users. AT&T Mobility (NYSE:T) has around 50 percent smartphone penetration, Verizon expects to achieve that in the first quarter of 2012, and MetroPCS and Leap Wireless (NASDAQ:LEAP) have around 25 percent penetration.   

But carriers have little choice but to take on the cost of smartphones. Voice is now more of a commodity, and it looks like SMS is trending that as well with the introduction of Apple's (NASDAQ:AAPL) iMessage and Facebook's Messenger. 

While there will be smartphone subsidy costs and network capex costs to deal with in the near term, supporting smartphones will be worth it. Capex costs will likely flatten out over the next year or two, and smartphone prices will continue to drop.

"I'm not sure I agree that capex increases are driven by smartphones," RBC Capital Markets analyst Jonathan Atkin told me. "The 4G capex is to put in place the platform, but the amount of spectrum available for 4G is so plentiful at the moment that smartphone adoption rates shouldn't affect capex."

Carriers are going through substantial capital investments right now for LTE and other capacity upgrades, but will largely be done with intensive capital spending within the next year or two. Further, as carriers upgrade to LTE, that will alleviate network pressure on their legacy networks, something Pete Ritcher, senior vice president of AT&T Mobility and Consumer Markets, pointed out last week. 

Additionally, the overall cost of smartphones is bound to keep on dropping. Verizon Communications CFO Fran Shammo predicted as much last week, which he said will be due in large part from pricing pressure from Chinese vendors like Huawei and ZTE. "Over time, handset [costs] came down," he said. "You now can buy a handset for next to nothing on the feature phone side. So on the smartphone, it's going to follow the same ecosystem."

Recon Analytics analyst (and FierceWireless contributor) Roger Entner said several factors will contribute to dropping smartphone costs: screen sizes and resolution have topped out; memory prices will drop; and LTE chipsets will fall in price as volumes ramp up. He said he expects to see many smartphones sold during the holidays this year for $99, and that price to drop by another $20 to $30 for the holidays in 2012.  

Smartphones, and the data plans carriers have tied to the devices, mean higher ARPUs. More and cheaper smartphones mean consumers will have access to a wider array of functions without taking a big hit in their wallet. ARPUs will eventually flatten out, but the cost to send a MB will decrease. The near-term costs in terms of subsidies and capex will be worth the long-term benefits.

"I don't think it's all that dark," Entner concluded. "I think that there's a lot more light than darkness. Like many consumer electronics things, it all has a happy ending." --Phil

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