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Summary:

U.S. carriers have a love-hate relationship with the iPhone and an analyst downgrade for AT&T and Verizon after the iPhone 5 went on sale illustrates why. Carriers may get customers, but they also have to shell out hundreds on a subsidy that cuts into their margins.

iPhone 5 product shot

An analyst firm downgraded both AT&T and Verizon’sstock to hold on Friday on fears that the two companies were overvalued and would see lowered margins because of the success of the newly launched iPhone 5. Stifel Nicolaus analyst Christopher King wrote in his downgrade notices, that because the iPhone 5 would go on sale during the third quarter, which was earlier than he expected, the sales would likely affect margins for both companies during the entire second half of the year.

In an earlier note he wrote:

“Given our assumption of approximately $425 in carrier subsidies per handset, we believe the U.S. carrier market could be on the hook for more than $10 billion over the last three and a half months of the year alone, entirely due to the new iPhone launch.”

No wonder AT&T’s Ralph de la Vega wants to see subsidies drop.

King also noted that AT&T was trading at a price-to-earnings ratio unseen since the third quarter of 2005, before the iPhone even hit Ma Bell. Meanwhile Verizon’s shares are trading at a P/E ratio that has hit a 10-year high. Basically King is saying the stock has hit a fair price point and thinks the second half of the year may prove disappointing because of the high iPhone subsidies.

But it’s not all gloom and doom for the carriers. They get new contract customers in a saturated mobile market that will use a lot of data. Since the carriers are doing everything they can to move customers to the newer and more profitable shared data plans, the up front margin loss should work itself out over the life of those contracts.

  1. The only people who win with subsidies are the phone oems. The average consumer would save money over the course of 2 years by buying a phone unlock and carriers would save money by not having to subsidize devices.

    If everyone was force to buy unsubsidized phones competition would drive prices down and we would no longer have to pay $600 for a $400 phone. Carriers could use the money that was going to go toward subsidization and use it on network improvements.

    The FCC really needs to step in and make it illegal for carriers to subsidize devices.

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    1. Excellent analysis

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    2. Isn’t this issue something the carriers have only themselves to blame. Unlike most of the world, they went to a subsidy / contract model once competition came into the market in the late 90s. Even Sprint, when they launched had bad phones that cost $200+ but which came with a contract free plan. Then, with the subsidies came agreements. Now, they want out. If they are serious about this, follow T-Mobile’s lead and offer cheaper plans in exchange for a subsidy free phone.

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  2. We all tend to look at the benefits of what the iPhone has brought to the industry. But, what about the negatives? This is one of them. Apple commands such a high dollar amount that carriers are perceived to absorb the costs. Initially? yes. Indirectly? no.

    The subsidized pricing difference for customers to walk out the door with an iphone is minimal. Upfront costs for carriers isn’t. Carriers then have to adjust their price plans accordingly to offset the cost. Guess who pays for that whether we want to support Apple’s ecosystem or not? Add in the equation that Apple maintains its MO to remain proprietary in accessories. This effects economoy of scale. Eliminating a one standard fits all. We again pay for this.

    Before Apple entered this industry where third party companies(the carriers) did not exist, Apple could command anything they wanted and it was the choice of consumer to purchase Apple or not without disturbing those that chose differently.

    Today, carriers have made it easy for anyone to afford an Apple device while making Apple very rich. But, it does come to the expense of EVERYONE; not just Apple consumers. Apple’s tight vertical integration has basically transformed itself into the industry franchisee. Carriers may have control of their networks, however, the pricing, product services and offerings have become totally dependent on what Apple dictates. I appreciated Apple as a stand alone company. Now that they have their hands into third party service providers, we are ALL affected and I am uncomfortable with this.

    John B.

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  3. Both Verizon and AT&T are tremendously profitable. I am glad the OEMs are keeping the carriers in line.

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  4. My assessment says It will be give a definate boost to AT&T and Verizon both to push 4g high speed data plan to drive new revenue source. I don’t know the basis of this analysis however it is hard for me to believe in any sense.

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  5. Unfortunately in the US consumers will not pay full retail for a phone and retail on smartphones are over priced as it is. The iPhone 5 64GB is $849, really, when you can get an Android 32GB Smartphone with micro HDSC slot that can support up to 64GB (which costs about $56) for around $550-600 retail.

    Perhaps the carriers should go back to 1 year contracts and charge more for the phones. I personally hate 2 year contracts but paying $849 for a 64GB iPhone is outrageous.

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    1. So, who would suffer in this scenario? You may not pay $849 so Apple would be forced to drop prices if they want to sell higher volumes. The carriers have such high penetration that the worst that could happen is that people would not upgrade phones as often.

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  6. Ahem, if you like it you buy it if not settle for something which the fandroids said are the better phones even though they are the dead end OS ones.

    Btw they are business decisions and not some rocket science thinking.

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    1. In the US Android market penetration is higher than iOS, so their devices are hardly dead end OS ones. Android OEM’s market their devices based on what the Carriers want, and are willing to sell. Carriers in the US control the market and its high time consumers take that control.

      Of course with a Gov’t that is bought a paid for everyday by lobbyists and back room deals we the voting consumers will never actually have any true power.

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