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Cell phone makers who were looking forward to decreasing device subsidies as a way to increase profitability have gotten some bad news from a test case in Spain.
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Earlier this month, two major telecom companies in Spain, Vodafone Group plc (NASDAQ:VOD) and Telefonica SA (NYSE:TEF) stopped offering cellphone subsidies to new customers, a move that companies around the globe have been considering to increase profitability. But according to reports from the Wall Street Journal, the decreased discounts also resulted in decreased cell phone sales. Previously, new customers could obtain Apple Inc.’s (NASDAQ:AAPL) latest iPhone for $250 when signing a two-year contract. Without the subsidy, the phone is offered at a much less affordable $800.
In addition to the disappointing news about cell phone sales, the data from Spain also suggests that the market for smartphones is growing less quickly than anticipated. Market research firm International Data Corp. intends to decrease its forecasts for smartphone sales in Spain to 7 percent of the mobile phone market, down from 21 percent, as the country deals with high unemployment and crippling debt.
U.S. companies have taken a more measured approach to handling profit-eating subsidies using strategies, such as increasing upgrade fees, to reduce the number of subsidies companies pay annually. According to first-quarter data, phone manufacturers stand to bear the brunt of decreased cell phone sales.
Still, as the market declined thanks to economic issues and changes to the subsidy model, sales of Apple phones in Spain increased 6.5 percent in the first quarter and Samsung saw a 41 percent spike in sales. Lagging phone makers, rather than market leaders, were the ones hurting the most: Nokia Corp. (NYSE:NOK) and Research in Motion Ltd. (NASDAQ:RIMM) both saw more than 40 percent drop in sales in Spain’s cell phone market. While reduced smartphone sales would certainly negatively impact carriers in the U.S. like AT&T (NYSE:T) and Verizon (NYSE:VZ), they would also punish already hurting mobile manufacturers.
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