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Smart phone sales are leaping off the chart. You don’t need a degree in anything to know that; all you need to do is sit on a train for a while, and count all those clever phones. That’s good for Apple, it may be good for Google, and it certainly seems to be splendid news for Samsung and Amazon, but what about the networks, the carriers? For them, this could be a problem. 
‘Why can’t we make money in aviation?’ asks the title of a book by Adam M Pilarski. The airline business, that is to say the companies that provide flights – not the manufacturers or airport owners – often make losses. Michael O’Leary may disagree, as might Sir Richard Branson, but many argue that airlines don’t make money in the long run.

It seems much of the problem relates to barriers to entry, or more specifically low barriers and price competition. Economic theory has this concept called Perfect Competition. Under certain conditions, companies make what economists call normal profits – that is enough money to stay in business, but they don’t make anything beyond that. The theory of Perfect Competition has flaws; for one thing, the conditions it assumes are not very realistic. The other snag is this: if a company can only make enough money to get by, it can’t build up a financial buffer. And when conditions get tough, it has nothing to fall back upon.

And certain industries do, it seems, struggle to make money in the long run.

New York taxi driving is another example. The snag here is not so much that taxi driving in the Big Apple doesn’t bring in the bucks, it is that you have to fork out so much money to get the appropriate badge to be eligible to drive a taxi in New York, that much of the money you make goes on the interest payments on the loan you had to take out.

In his book the ‘Trouble with markets’, Roger Bootle argued banks may fall into a similar camp.

And maybe the same can be said of the network carriers.

The snag is that they all want to offer a network that can support smart phones. And O2 made a handsome profit for its initial exclusive arrangement with the iPhone in the UK. As indeed was the case with Orange in France and T-Mobile in Germany.

But, look beneath the surface and things look less rosy.

About 18 months ago, Denmark’s Strand Consult released a report saying that network companies have to offer such high subsidies to users to get them to take an iPhone, and offer Apple such a good deal, that the product can become a loss leader.

But there is another issue. As more people use smart phones, the data usage becomes a drain on margins.

In the US, EBITDA service margins at AT&T, Sprint and Verizone have falling sharply. That is according to a piece on CNNMoney, see The iPhone is a nightmare for carriers (The iPhone is a nightmare for carriers). There is a pretty good inverse correlation between margins at Verizon with sale of iPhones. And in one quarter, when iPhone sales stumbled as users waited for the next Apple release, margins at Verizon began to improve.

As usage of smart phones rises, does that mean the carriers will find it harder to make a profit? Or is this just a temporary blip. Time will tell.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees