First year subsidies to cut deeply into profits

Because of subsidies and other inducements to attract customers, Verizon's first year with the iPhone may cost it a bundle, amounting to over $400 per new customer with an estimated 13 million potential iPhone sales, totalling $5.2 billion dollars, speculates UBS analyst John Hodulik in a new BusinessWeek article. Other analysts, such as Barclays' James Ratcliffe, disagree on the size of subsidies and potential sales but still think Verizon could lose at least $3 billion on the first year of iPhone availability, though of course it will more than make up for any losses over the length of the contracts.

Verizon is expected to announce tomorrow that they have finally obtained rights to sell the iPhone on their own network at an event in New York, and will make it available to consumers later this month. No new plans for the device are expected, meaning customers will have to trade more-expensive data plans for Verizon's perceived superior network coverage, particularly in tech-heavy cities like New York and San Francisco. It's also possible that the CDMA-compatible iPhone may cost slightly more due to its more-expensive components, but is otherwise identical to the current AT&T iPhone 4.

UBS' Hodulik believes subsidies and incentives amount to "[writing] customers a $400 check" and says Verizon will sell 13 million iPhones in the first year, resulting in a $5.2B expense. Barclays' Ratcliffe believes the sales will be more like nine million, with subsidies totalling around $350, making for a $3.2B loss. Wireless companies pay Apple a set price for the iPhone and then discount it heavily to encourage two-year contracts and customer loyalty, making the losses back through monthly charges for voice and data. The iPhone generally commands a much higher subsidy than most other smartphones, according to iSuppli analyst Tina Teng.

Holulik believes the first-year loss will reduce earnings-per-share from Verizon from $2.26 last year to $2.20 in 2011, with some profitability gains on expanding data plans that generally accompany the increasing popularity of smartphones, the iPhone included. Data plan billing for both AT&T and Verizon increased about 20 percent last year.

He believes Verizon will, overall, add about 2.1 million net new subscribers for 2011, compared to an estimate of 650,000 net new customers for AT&T -- enabling Verizon to outpace AT&T's growth for the first time. Hodulik believes that AT&T will still sell six million new iPhones in 2011, less than half the 15 million they are estimated to have sold in 2010. That, plus reduced subsidies to Apple for the loss of exclusivity, will actually save AT&T about $4 billion, allowing them a more profitable year than they would have otherwise had, despite the loss of some current customers to Verizon. [via BusinessWeek]

By Electronista Staff