groveChuck
U-matic Member
AT&T, Sprint and Verizon, which pay hefty subsidies on the iPhones their customers buy, have seen their earnings and stock prices drop since they began offering the Apple handsets.
Turns out your carrier is actually losing money on that exorbitant iPhone contract you just signed. Apple charges carriers so much for the privilege of selling iPhones that service providers can't turn a profit. The 4S that cost you $200? AT&T paid around $600, eating $400 every time you upgrade. It's proving to be a lousy business model for phone companies, and is raising red flags on Wall Street. "Can Apple continue to roll through industry after industry, soak up all the profits, and leave everything it touches as a smoking wreckage?" one analyst asked in the Los Angeles Times. "They've done it with music and handsets, and now they're doing it to the carriers."
The iPhone has been a huge hit for Apple Inc., helping send the company's stock to all-time highs and producing record-breaking profits.
But for AT&T Inc., Sprint Nextel Corp. and Verizon Communications Inc., it's breaking the bank.
The three wireless carriers all found themselves answering to Wall Street in recent weeks for posting depressed quarterly earnings, and analysts pointed to the heavy cost of offering the iPhone as a culprit.
The iPhone has become the single most popular smartphone in the U.S., and that has left the carriers trapped in a kind of Faustian deal: The more iPhones they sell, the more money they lose.
That's because they have to buy the phone from Apple before they can sell it to their customers for hundreds of dollars less. The carriers are betting that they'll make back the difference and more by signing up customers for two-year plans and collecting monthly fees.
But so far, the carriers are finding that the math isn't adding up.
AT&T was the first carrier to offer the iPhone and has been struggling to make it profitable for years. During the last quarter, the iPhone accounted for 82% of the smartphones AT&T sold to its customers, meaning the company had to pay the hefty subsidy on each of the 7.6 million iPhones. All that money paid to Apple tugged down the company's profits. AT&T's operating margins — a common measure of how much a firm makes — dropped to 15.2% from 22.9% a year earlier.
"The AT&T wireless model is broken," said Kevin Smithen, a wireless analyst at Macquarie Securities. "AT&T is basically subsidizing Apple's revenues and profit growth."
Investors have taken notice: Since June 29, 2007, the day AT&T first offered the iPhone, Apple's stock has shot up more than 300%, to $493.69 from $122.04. Meanwhile, AT&T's stock has dropped 28%, to $29.82 from $41.40.
Sprint's stock is down more than 16% since it began selling the iPhone late last year. It sold 1.8 million iPhones last quarter, spending $630 million to buy them from Apple. That was a large contributor to the company's $1.3-billion quarterly loss — a 40% wider loss than the struggling company saw a year earlier, before it offered the iPhone.
Verizon sold 4.2 million iPhones last quarter, accounting for more than half of the smartphones it sold. But despite those strong sales numbers, Verizon's profit failed to meet Wall Street's expectations, and the firm's stock dropped 2% after its earnings release.
Wireless carriers began subsidizing the cost of cellphones years ago, in an era of simpler, less expensive "feature" phones. Carriers might have offered a $300 phone to consumers for $100.
But that doesn't work well with the much more expensive iPhone, which companies buy from Apple for about $600, analysts estimate, before reselling it to consumers for $200 — eating the $400 difference.
A particularly sticky issue for carriers is that many iPhone users don't want to wait for their two-year contract to expire to buy the latest model, which has come out once a year.
http://articles.latimes.com/2012/feb/10/business/la-fi-iphone-blues-20120211
Turns out your carrier is actually losing money on that exorbitant iPhone contract you just signed. Apple charges carriers so much for the privilege of selling iPhones that service providers can't turn a profit. The 4S that cost you $200? AT&T paid around $600, eating $400 every time you upgrade. It's proving to be a lousy business model for phone companies, and is raising red flags on Wall Street. "Can Apple continue to roll through industry after industry, soak up all the profits, and leave everything it touches as a smoking wreckage?" one analyst asked in the Los Angeles Times. "They've done it with music and handsets, and now they're doing it to the carriers."
The iPhone has been a huge hit for Apple Inc., helping send the company's stock to all-time highs and producing record-breaking profits.
But for AT&T Inc., Sprint Nextel Corp. and Verizon Communications Inc., it's breaking the bank.
The three wireless carriers all found themselves answering to Wall Street in recent weeks for posting depressed quarterly earnings, and analysts pointed to the heavy cost of offering the iPhone as a culprit.
The iPhone has become the single most popular smartphone in the U.S., and that has left the carriers trapped in a kind of Faustian deal: The more iPhones they sell, the more money they lose.
That's because they have to buy the phone from Apple before they can sell it to their customers for hundreds of dollars less. The carriers are betting that they'll make back the difference and more by signing up customers for two-year plans and collecting monthly fees.
But so far, the carriers are finding that the math isn't adding up.
AT&T was the first carrier to offer the iPhone and has been struggling to make it profitable for years. During the last quarter, the iPhone accounted for 82% of the smartphones AT&T sold to its customers, meaning the company had to pay the hefty subsidy on each of the 7.6 million iPhones. All that money paid to Apple tugged down the company's profits. AT&T's operating margins — a common measure of how much a firm makes — dropped to 15.2% from 22.9% a year earlier.
"The AT&T wireless model is broken," said Kevin Smithen, a wireless analyst at Macquarie Securities. "AT&T is basically subsidizing Apple's revenues and profit growth."
Investors have taken notice: Since June 29, 2007, the day AT&T first offered the iPhone, Apple's stock has shot up more than 300%, to $493.69 from $122.04. Meanwhile, AT&T's stock has dropped 28%, to $29.82 from $41.40.
Sprint's stock is down more than 16% since it began selling the iPhone late last year. It sold 1.8 million iPhones last quarter, spending $630 million to buy them from Apple. That was a large contributor to the company's $1.3-billion quarterly loss — a 40% wider loss than the struggling company saw a year earlier, before it offered the iPhone.
Verizon sold 4.2 million iPhones last quarter, accounting for more than half of the smartphones it sold. But despite those strong sales numbers, Verizon's profit failed to meet Wall Street's expectations, and the firm's stock dropped 2% after its earnings release.
Wireless carriers began subsidizing the cost of cellphones years ago, in an era of simpler, less expensive "feature" phones. Carriers might have offered a $300 phone to consumers for $100.
But that doesn't work well with the much more expensive iPhone, which companies buy from Apple for about $600, analysts estimate, before reselling it to consumers for $200 — eating the $400 difference.
A particularly sticky issue for carriers is that many iPhone users don't want to wait for their two-year contract to expire to buy the latest model, which has come out once a year.
http://articles.latimes.com/2012/feb/10/business/la-fi-iphone-blues-20120211
