Rising Apple iPhone subsidy costs force Sprint CEO Dan Hesse to take pay cut

Rising Apple iPhone subsidy costs force Sprint CEO Dan Hesse to take pay cut
With the spiraling costs of subsidizing the Apple iPhone cutting into Sprint's profits, company CEO Dan Hesse said he would take a cut in pay to help the company recover some of the costs. In a letter to the carrier's human Resources department., Hesse said that he would take a cut in pay that would allow him to repay $346,000 in incentive pay that he had already received. Further cuts will make Hesse forfeit huge sums of incentive pay that he was eligible to receive under terms of his contract. All together, Hesse will be missing out on $3,250,830 that he was entitled to receive after Sprint's compensation committee made some adjustments to his pay. Hesse said that after taking everything into account, his 2012 incentive compensation target has been cut to 2010 levels.

Sprint has made a $15 billion commitment to the Apple iPhone. While adding the iconic smartphone to its lineup has helped the nation's third largest carrier add new subscribers, it comes at a high cost since Sprint subsidizes most of its iPhone sales. The carrier started selling the iPhone last October 7th and pays Apple a subsidy for each phone it sells that is 40% higher, or $200 more, than the subsidy it pays to manufacturers for other phones. In the most recently released quarter, Sprint sold 1.5 million units of the Apple iPhone and the device helped Sprint add 1.1 million new subscribers in the period to a company record 56 million customers.
 
source: Reuters

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142 Comments

1. KingKurogiii

Posts: 5713; Member since: Oct 23, 2011

dang! he almost could've bought an iPhone with that money he's paying. xD

2. Fluxman

Posts: 51; Member since: Jun 03, 2010

I can see this as the beginning of the downfall of iPhone. The carriers will start to realize they don't make that much money from the iPhone, due to the high subsidies. Salesman will be instructed to push the more profitable Android and windows phones. Apple may start to lose some leverage and if they want to stay competitive, will have to buckle to the carriers and lower the subsidies or wither into obscurity...

4. 14545

Posts: 1835; Member since: Nov 22, 2011

Exactly. I've been saying for a while that I think this will sink sprint. Then the other carriers will wise up and bump the iphone down a peg or two. Cause it eats directly out of their bottom line. From what I've been told, and this is just from a rep at a store so it can be taken with a grain of salt, is that they pay like 5-600 for the iphone, where the typical droid/w7 phone only hits them with a 4-450 per phone. Then CNN wonders why VZW tries to push other phones. I would have my employees push the cheaper ones too. Especially when it can easily be sold as a better phone. The only thing that I can give apple is their displays. That, and maybe the fact that they are practically idiot proof.

11. Contreramanjaro

Posts: 153; Member since: Dec 04, 2011

iPhones are really gaining popularity with the older crowd as far as I've seen. This is good for Sprint I think because older people seem to be more content with having an old iPhone. An example would be that my father uses an HTC Hero that he bought over two years ago. He takes perfect care of it and it runs as well as it did the day he bought it. He has no desire for a new phone. Using a whopping 300MB a month, this is a good profit for Sprint. I don't see the iPhone as a bad thing for Sprint because so many people are keeping their iPhones two or more years. Hell, so many people don't even update the software ever.

40. JeffdaBeat unregistered

I think you forgot the problem with Demand. If people still want the iPhone the carriers can't just "knock it down a peg or two." Remember when Verizon didn't have the iPhone and pushed Android like nuts? That didn't spot the main reason for porting out being the iPhone (they still gained far more customers than they lost). There is no real answer for this. Both sides negotiate the final price the customer is presented, so I don't think they can lower the subsidy unles Apple and the carrier come to some agreement. Apple could lower their margin...but is Apple really going to do that if right now, their phones sell better than any other model? Still, I wonder how Sprint couldn't see this coming. Are they just selling more iPhones than they expected? When they came forward witht he deal, they had to have figured we are going to sell X amount of iPhones and we will need X amount of capital to cover it. I also can't feel bad for a rich guy losing a few millions. hehe.

43. ibap

Posts: 867; Member since: Sep 09, 2009

There is a very easy way for the carriers to "knock it down a peg or two". Let the price rise. As their contracts with Apple come to their end, if they all wised up and promoted the fact that there are easy interfaces on other phones as well, the 'demand' for the iPhone will in fact drop, or at least they won't have to be subsidizing them so much more heavily than other phones. And I'm totally tired of "iPhone" being a substitute for the term "smart phone", which just demonstrates ignorance. This could be a loss of trademark issue. Too many people out there think "iPhone" means "smartphone" and they use the term that way. Apple can scream all they want at tiny competitors over trademark issues, but if it makes its way into the vernacular, they'll lose it. If they think that is a good thing now, they won't when the trademark is lost.

47. remixfa

Posts: 14605; Member since: Dec 19, 2008

the problem is that apple demands the phone be sold at a certain price, as well as selling it to the carrier at a higher than normal price. They have a lock down. If it wasnt for that, I bet you would see carriers start to inch up the iphone in price to reduce the subsidy hit. When VZW didnt have the iphone, they still added more people than ATT when they had the exclusivity, so the iphone is not the end all be all. Its still stagnant to losing world wide marketshare, even with its increased availability. Selling it at a discount at walmart is a sign that they actually do care about marketshare and that they do see the downward trend continuing. Why else would they go from the snotty "if its not an iphone" campaign to selling for $100 at walmart?

51. taco50

Posts: 5506; Member since: Oct 08, 2009

Check up on Walmart. That price was a mistake and the iPhone is now selling at full price again

76. JeffdaBeat unregistered

I always felt the reason Verizon had a higher influx of subscribers is because for the majority of folks who didn't want a smartphone, Verizon offered a far superior network. Even when I worked for AT&T during the time fo the 3G, 3GS, and iPhone 4, the majority of the phones I sold were not smartphones until the very last few months. AT&T was quite frankly mocked for their terrible service, even by their customers...but if you wanted an iPhone, you had to go to them. So for folks who just wanted a basic or messaging phone, Verizon was a better bet and the same cost. But you are right, the iPhone isn't the end all be all. I don't think it would be realistic for even Apple to think it would be given the way it does business. Android and WP7/8 can be made by any manufacturer. Many of those manufacturers put out multiple phones per year. Like Microsoft, it's inevitable that Android will have a higher use rate. If Apple didn't see that coming, I don't know what to think. But although Android is more and more popular since there are so many of them out there, iOS is still incredibly popular as well. I'm not sure that carriers can really afford to just write it off and say, well we just won't offer the iPhone because we have Android. The numbers aren't quite that low and any company that did that would lose million of folks who won't use anything else. But still, something has to change. Apple doesn't have that 2007/2008 power it used to when it was the monolith of consumer smartphones. I'll be honest, I'd like to see Apple cut prices a bit on a lot of its offerings. I know they like huge profits and the price also distingushes them from their competitors. But as much as carriers don't want to lose millions of subscribers...if one decides enough is enough, who's to say another may say the same a week later?

142. remixfa

Posts: 14605; Member since: Dec 19, 2008

somehow i missed your comment. My thoughts have been that its a game of industry chicken over who will start to buck apples sales demands first. They all wanted the phone to stop any phone related churn, but no one wants the pricing structure.. its not good for them. IF one of them ever gets the cahones to tell Apple that they either get in line with the other manufacturer's pricing or they get dropped, expect the rest to follow suite after their contracts are up. I just dont think anyone "wants" to be the first one and risk being left high and dry if the others dont follow suit. Who knows, maybe they will try a program like T-Mobile's Value plan to try to even the cost playing field. I wonder how that would mess with their Apple contracts for pricing.

129. lsutigers

Posts: 832; Member since: Mar 08, 2009

This is nothing more than Hesse trying to justify his decision to carry the iPhone to the Board of Directors. Sprint is selling alot of iPhones, specifically to new customers, which is good because that means a lot of people are jumping ship from other carriers to Sprint. However, those iPhones are costing the carrier a lot in subsidies, just like AT&T and VZW, and this move makes Hesse look like a hero. See, I told you it was a good idea to carry the iPhone and, on top of that, I will subsidize the phone with my paycheck.

120. Whodaboss

Posts: 176; Member since: Nov 18, 2011

And people wonder why Sprint isn't going all out too support WP devices. It's because they have to recoup as much money on the iPhone. Why would they push another device when they know they have to make that iPhone deal work. But they sold their soul they just have to deal with it!

128. QWIKSTRIKE

Posts: 1459; Member since: Mar 09, 2010

I have said this before, and I'll say it again Sprint is coming to the party too late. iPhone for 15 billion dollars is way to much of a price to have paid. Verizon is pushing Droid to offset selling iPhone subsidies. It's noble that Dan is giving up his bonus to share in the loss of revenue. He made a business deal and is taking responsibility for it going wrong. In the end LTE and unlimited will help Sprint grow, but Verizon recognizes this and is trying to offer a 79.00 plan close to Sprint's plan to cajole Sprint users their way! Sprint has unlimited, and if they use that, and get top tier phones a few quarters in a row they could win. They must shift focus to the windows phones, and other top phones, because I will leave before I had to buy an iPhone. I believe if they got top of the line phones to sell, and offered iPhone they could bleed away subscribers from other carriers once NV is rolled out in all markets.

130. lsutigers

Posts: 832; Member since: Mar 08, 2009

I hear ya but they will be getting some nice Windows phones this Fall. Sprint and Verizon seem to be on the same page regarding WP. Since WP hasn't caught on at ATT and TMO, they are being cautiously optimistic. It's a big investment to carry a phone and market it properly.

17. Pdubb

Posts: 249; Member since: Aug 08, 2011

i thought that Sprint pays for the phones so they push them to recoup some of the money they have already paid for the phone. That is why the carriers are so upset right now and looking for that other stand out phone so they can gain some leverage on Apple. Apple calls the shots right now. Do you think Samsung cut a $15 billion deal for the Galaxy?

18. kanagadeepan

Posts: 1264; Member since: Jan 24, 2012

Definitely Samsung won't cut a 15b$ deal for any Galaxy... The reason is Sammy is NOT as evil as Apple...

53. taco50

Posts: 5506; Member since: Oct 08, 2009

Yes because Samsung isn't in this to make money. They just want to provide you with cheap phones.

55. jbash

Posts: 345; Member since: Feb 07, 2011

thats the first time i gave taco a thumbs up

58. TROLL

Posts: 4851; Member since: Apr 13, 2012

Not cheap but allsorts Budget Midrange High end

64. taco50

Posts: 5506; Member since: Oct 08, 2009

It's was sarcasm. According to the latest data Samsung makes 20% of smartphone profits while HTC, Motorola, LG etc all lost money. I guess that means Samsung is greedy and has overpriced products. They made more profit than all other android OEM's combined. Time to buy from a company that loses money so you know you're not overpaying.

66. remixfa

Posts: 14605; Member since: Dec 19, 2008

Samsung also outsold apple, while only making 1/5th of apple's profits. oh.. wait.. samsung outsold apple.. doesnt that mean u should be self exiled? liar.

112. ngo2dd

Posts: 896; Member since: Jul 08, 2011

Outsold apple in Smartphone sell. Samsung has a hell lot more model out there. Stop being dumb, Samsung has like what 15 or 16 model of smart out maybe more.

132. androidsbiggestfan

Posts: 76; Member since: Aug 09, 2011

I don't normally say anything, but you really jacked up bad this time you troll. You say HTC lost money, try again, they had a net income of $151,356,000 after taxes. Try to back your way out of this after you review from HTC directly. http://www.htc.com/www/investor/

134. wendygarett unregistered

HTC just want to be HONEST to their investor... he really lost a lot of money eventhough he get a huge income... he just want to show how strong the competitor is facing

110. atheisticemetic

Posts: 377; Member since: Dec 18, 2011

cheap quality phones? yes...samsung makes those too

122. remixfa

Posts: 14605; Member since: Dec 19, 2008

sad fact is that this jacko keeps forgetting that samsung makes most of the iphone as well. so yea, cheap phones.. woot. they save all the good stuff for their own models.

60. TROLL

Posts: 4851; Member since: Apr 13, 2012

Much TRUe said.... Apple a company will never has sponsored On anything... They will drain blood out Ov u....

131. lsutigers

Posts: 832; Member since: Mar 08, 2009

Do you really think Samsung is that noble of a company...they would do it in a heartbeat if they could. Problem is they have that little thing called competitors to worry about.

49. thedarkside

Posts: 654; Member since: Apr 30, 2012

verizon loses a dollar everytime an iphone is purchased. a dollar may not seem like much, but when verizon is pay $650+ for an iphone, than can only drop the price to what apple says, and on top of that loses another dollar. that money adds up. plus apple makes all there own prices, so the iphone, unless its an older model, wouldnt ever drop in price.

69. Mr.Verizon

Posts: 24; Member since: Feb 12, 2012

To give you all an example, we currently pay 659.00 for a 16gb iphone 4s white or black. The droid razr maxx costs 629.99 and sells to the customer for $100 more than iphone. Thats a $130 swing and thats not including the commission payback from verizon which... you guessed it, they pay more for android sales than iphone so its around a +170ish change for that example. If apple was really really smart, they would make 3 different models of iphones. Keyboard, 4g, low end, and reduce the costs to carriers... they would probably sell another 20-30 million in north america alone (including canada). But they do have this sort of "we know what people want better than you" ingnorance and while they do have some good crushing numbers. There is a reason android owns so much market share..... its called "Choices". If apple had more, then i'd honestly have to say they'd have majority market share.

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