Apple iPhone 5 not so good for AT&T and Verizon

The iPhone 5 was finally uncovered on Wednesday and to say that Apple has another hit on its hands is somewhat of an understatement. Although there have been some rumblings of discontent about it not being exactly groundbreaking, those in the know seem impressed by what the new phone has to offer. Apple is thrilled with the demand and most potential customers seem eager to get their hands on it but it seems that the iPhone 5 is not so good for giant U.S. carriers AT&T and Verizon.

We told yesterday of the phenomenal demand for the iPhone 5 and how pre-orders had sold out in the first hour so you would imagine that this would be good news all round. However because of margin pressure from the launch of the new iPhone next week, shares for both carriers fell by over 2% on Friday after stocks were downgraded to hold. Margin pressures occur for wireless carriers because of the subsidies they pay Apple in order to keep the prices competitive for customers. For instance whereas a carrier might pay over $400 to Apple for an iPhone, the price to the customer with a two-year contract is only $199. Therefore profit margins for the carriers involved in the initial months of a new popular device are weighed down by subsidies that have to be paid.

Christopher King, an analyst for Stifel Nicolaus, has therefore removed his buy rating on AT&T and also Verizon and noted that estimates have had to be revised as it was originally expected that the iPhone 5 would launch in the fourth quarter. However as it arrives on September 21 the launch now affects figures for Q3. King explained, “Thus, we believe potential downside to earnings estimates exist as we enter the back half of the year,” according to MarketWatch. Because there will only be 11 days of iPhone 5 sales before the conclusion of Q3, King also noted that there would be more pressure on AT&T and Verizon in the fourth quarter.

King’s predictions now are that service margins for AT&T will now fall by 12.6% before the year is out while for Verizon that figure is 5.3%. Strange to think that if the new iPhone hits shortages, as seems very likely from the initial demand, then that would actually mean that EPS numbers for both carriers would rise because of lower subsidies paid. It’s an odd state of affairs to consider that a product that generates so much money can actually cause a detrimental effect for carrier profits when it is first released but as Craig Moffett of Bernstein Research explains, “When a customer who already has a smartphone upgrades to a new one, there’s lots of incremental cost…but not much incremental revenue.”

We’d like to hear readers’ thoughts on this as we imagine many thought that both AT&T and Verizon would receive a huge initial boost of profits with the iPhone 5. Are you surprised to hear that earnings estimates of wireless carriers can be affected by an iPhone launch in a negative way? Send us your comments on the iPhone 5.

Comments

16 thoughts on “Apple iPhone 5 not so good for AT&T and Verizon”

  1. Reply
    Kaffeguy says:

    I don’t know much as to the parts content ad prices for manufacturing of cell phones and smartphones. I don’t see how a smartphone can retail for $850 to $1000 U.S. Dollars. It seems so outrageous that they cost as much as a computer and in some cases it appears to be much more. This is not just for the Apple iPhone this is for all brands. Why the high cost when I hear that parts are not too expensive and labor is definitely not too much of an expense. Does some in the know of things please explain or refer me to a site that explains this? Thanks

    1. Reply
      Koolbreeze says:

      I can explain it in one word: Greed. Apple, for example, has billions, that’s with a B, in the bank as pure profit. And then they have the gall to sue Samsung because they’re scared that Samsung will beat them at their own game. Which is one of the many reasons I will upgrade my iPhone 3G to Samsung Galaxy S3.

      1. Reply
        Ken says:

        Gall? Last time I looked when someone copies you, you take action to protect your interlectual property. Likewise if apple have stolen LTE tech from Samsung then it will be expected that Samsung take apple to court and clean up. Business is business. My former company took LG to court for theft of our motor drive tech wich they blatantly stole.

    2. Reply
      Crash says:

      Simple supply and demand. People are paying for the convenience and hopefully the ecosystem that they prefer that goes with their device.

  2. Reply
    PAUL DESCHAMPS says:

    Greed is definitely the word with crApple. It’s come out that the new iPhone 5 costs $164 to make & they sell it for $749 for the 16gb model. Even more bull is the no expandable memory so the 16gb model is gonna be useless so you have to get at least the 32gb model which for some stupid reason is an extra $100, yeah that’s $849 for outdated technology & a small 4″ screen. For $849 you can get a Galaxy Note 2 next month that’s twice as powerful, has expandable memory, a huge 5.5″ screen & an amazing stylus full of features in the S-Pen. Why the hell would you want the iPhone 5 when you can get the Galaxy Note 2 for the same price or for a comparable Android to the iPhone 5 for HALF the price? If you buy an iPhone 5 your a complete moron. – KID ANDROID

    1. Reply
      Crash says:

      Mostly because I want a phone that fits in my shirt pocket. I have an iPad to do more serious computing and make music with GarageBand, etc. I’ve been down the Android road and it’s too fragmented with apps that don’t work well because of all the handsets and screens the app developers have to try to deal with. Just didn’t work for me.

      1. Reply
        Ken says:

        Agree with you. Don’t get me wrong, Samsung make great products and I like the Note but just wish it had a better holistic operating system. For me Apples ecosystem is more cohesive, slicker with greater finesse and attention to detail both aesthetically and functional. I also find it amusing how passionate android users are at hating Apple. They waste so much energy for what?? Both systems are awesome in their own right, one is not better than the other, it comes down to personal preference.

        1. I have a galaxy note and its awesome, i couldnt own a little iphone because i buy all around the world and do everything a computer does, the iphone is not there yet.

          1. Ken says:

            The idea of the note has been growing on me. They look good. I have a new iPad, so I struggle to look at my iPhone now so I understand your point. BTW, apple maps suck, ha ha… Very disappointing. The rest of io6 is ok.

          2. What Thuh says:

            Aymen to that! I am still sporting my Dell Streak. Its like a mini laptop yet, you can make calls too. This thing smokes the iphone. I have a Galaxy Note too! Iphone does not compare

  3. Reply
    What Thuh says:

    Thats what AT&Terrible deserve for kicking the rest of her customers to the orphanage like “big-red (headed) stepchildren while she slept in bed with jobs then practically reconstructed the entire network around “jobs and his play thing” and passed the costs down to the customers, including the many who hadn’t given and still dont give a rat’s infested @$$ about jobs or his crapple!

  4. Reply
    Alex says:

    I think we (customers) are part of the issue. Why? Because everytime there is something new out there, we jump on it and want it right away.

    1. Reply
      What Thuh says:

      And you know, Alex, a BIG AYMEN! to that fact is in order! I ditto that (which would take a lot of sting out of my rant below) :o)

  5. Reply
    me says:

    It’s not greed. It’s the American way…PROFIT, that stays here in thhe USA, not Korea, not Japan not China. GO APPLE!

    1. Reply
      What Thuh says:

      Yes, Me! You too, have a valid good point. Dang it! My “hot-air balloon post a few comments down” deflated, crashed and burned.

      Speaking of the American Way (i wish someone would tell DELL to bring products back “home” instead of foreign releases and support…but thats a totally different article topic…sorry about that)

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