Cost Accounting (14th Edition)

518 CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS
Concepts in Action
iPhone “Apps” Challenge Customer
Profitability at AT&T
AT&T is the second largest wireless provider in the United States. The
company provides mobile telephone and data access to more than 85 million
individuals, businesses, and government agencies. AT&T uses cost
accounting to price its various wireless service plans and calculate overall
profitability for its customers, including more than 10 million owners of
Apple’s iPhone. AT&T is the exclusive wireless provider for the popular
iPhone smart phone.
Traditionally, the cost of serving different wireless customers varied.
Most business customers, for example, required reliable service
during business hours and large amounts of data bandwidth for e-mail
and Internet access. In contrast, many individuals use their wireless
devices extensively on nights and weekends and use features such as
text messages and music ringtones. Accordingly, wireless providers
considered the costs for these services when developing pricing plans
and calculating customer profitability. Therefore, individuals using
their phone service sparingly could select a less-expensive plan with
fewer minutes, for use mostly at night and on weekends, whereas
more-demanding individuals and lucrative business customers chose
plans with more telephone minutes, large amounts of wireless data bandwidth, and guaranteed reliability . . .
for a higher price.
When AT&T began selling the iPhone in mid-2007, cost accountants projected the profitability for its new
customers, and new plans were designed accordingly. Similar to traditional wireless plans, iPhone buyers
were offered subscription options with different amounts of telephone minutes at different price points. For
example, 450 telephone minutes cost $59.99, while 1,350 minutes were $99.99. However, to showcase the
iPhone’s wireless and Internet capabilities, Apple insisted that AT&T offer only one data package, an
unlimited plan.
While the unlimited data package proved initially lucrative, technology developments added significant costs to
AT&T. When Apple introduced the iPhone 3G in 2008, the third-generation data capabilities encouraged software
developers to build new programs for the iPhone platform. Within two years, nearly 140,000 applications, ranging
from Pandora’s mobile music player to Mint’s on-the-go budgeting program, were downloaded more than 3 billion
times by iPhone users. Each of the applications, however, uses a lot of data bandwidth.
Recall that AT&T does not charge iPhone subscribers for marginal bandwidth use. As a result, subscribers
who download and use many iPhone applications quickly became unprofitable for the company. With each
100MB of bandwidth costing AT&T $1, the company is currently considering cost-reducing options, such as limiting
data access and changing its all-you-can-eat data subscription plan, but it is very concerned about alienating
its customers.
iPhone application usage has also created a bigger cost problem for the company. With data bandwidth on the
AT&T wireless network increasing by 5,000% between 2006 and 2009, the company’s network is showing signs of
strain and poor performance. To act on these concerns, AT&T will spend $18–19 billion making improvements to its
data network in 2010, and more in the years to come. As a result, AT&T will need to balance customer satisfaction
with ensuring that its iPhone customers remain profitable for the carrier.
Sources: AT&T Inc. and Apple Inc. 2007. AT&T and Apple announce simple, affordable service plans for iPhone. AT&T Inc. and Apple Inc. Press
Release, June 26. http://www.apple.com/pr/library/2007/06/26plans.html; Fazard, Roben. 2010. AT&T’s iPhone mess. BusinessWeek, February 3; Sheth,
Niraj. 2010. AT&T, boosted and stressed by iPhone, lays out network plans. Wall Street Journal, January 29; Sheth, Niraj. 2010. For wireless carriers,
iPad signals further loss of clout. Wall Street Journal, January 28.
Sales Variances
The customer-profitability analysis in the previous section focused on the actual profitability
of individual customers within a distribution channel (retail, for example) and
their effect on Spring Distribution’s profitability for June 2012. At a more-strategic