Apple iPhone Success Strangles Profits At Sprint, AT&T, Verizon
Apple’s iPhone is selling like hotcakes.
This should be good news for Sprint (S), AT&T (T), and Verizon (VZ). The reality is far different; Apple is killing phone carriers.
Sprint just reported quarterly earnings and says it sold 1.8 million iPhones. However, the earnings report showed that iPhone is killing profits at Sprint. Sprint said that 40% of iPhone sales in the fourth quarter were to new customers.
The iPhone is certainly bringing in new business to Sprint, but Sprint has to subsidize iPhones heavily. Sprint wanted the iPhone so bad that it guaranteed Apple $15.5 billion for the ability to sell Apple products over the next four years.
Previously when AT&T reported earnings for the fourth quarter, they were also dragged down by heavy iPhone subsidization costs.
I have previously written about the impact of the iPhone on Verizon in an article titled Apple iPhone A Bittersweet Taste For Verizon.
An iPhone 4S that a consumer can buy for $199 with a two year contract reportedly costs carriers about $500.
Moreover, iPhones are data hogs. Carriers have to make major investments to support the huge traffic volume.
iPhone 4S is particularly troublesome to carriers. The Siri virtual assistant feature in iPhone 4S connects to an Apple data center every time it is used. For background, please see my prior article Siri Is Apple’s Post-Jobs Ticket To $1,000. Siri users end up consuming twice the bandwidth compared to those who do not use Siri.
Increased traffic is a vicious cycle for carriers. More traffic means more dropped calls and more difficulties using Siri. This results in more calls to customer service and churn of users.
Carriers are between a rock and a hard place. They have to carry the iPhone to attract customers, but it costs them. In comparison, devices based on Google(GOOG) Android, and those from Research In Motion(RIMM) are subsidized to a lesser degree.
From an investors perspective Apple is the only winner here.
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