Verizon takes a Hit from the iPhone

by Matt Klassen on January 25, 2012

As fourth quarter fiscal numbers continue to roll out Verizon has offered up a free lesson in why these reports always require a little interpretation. On the face of it, hearing that Verizon posted a $2.02 billion loss in Q4 2011 one might think that the country’s largest wireless provider may have hit some turbulent waters, perhaps a victim of a mass subscriber exodus or slumping mobile sales.

However, in Verizon’s case neither could be farther from the truth, as despite the loss the company experienced a quarter of surging revenues; seeing a significantly increased subscriber base—not doubt thanks to customers wanting to distance themselves from the AT&T/T-Mobile fiasco—and a jump in smartphone sales (which now account for almost half of Verizon’s wireless subscribers).

Instead it looks like the reason behind the quarterly loss is nothing more than a confluence of untimely events; in this case a hefty dose of pension costs mixed, strangely enough, with the increased holiday sales of the newest iPhone.

While admittedly there’s usually little of interest in quarterly revenue reports and fiscal forecasts it’s usually because you have to dig to find the interesting tidbits of information, and in this case it’s what the report says about the iPhone.

It never ceases to amaze me at just how damaging Apple’s iPhone can be to a company’s profit margins. The crazy thing about Apple is that it’s so thoroughly hoodwinked the general populace into craving its products that it finds itself in the enviable position of being able to demand whatever it wants from wireless carriers. In Verizon’s case, part of its distribution agreement with Apple see’s the wireless giant pay hefty subsidy costs for each iPhone sold, and given that the company activated 4.2 million iPhones in Q4 2011 alone, one can only imagine how much that cost the wireless giant.

As a brief aside, if Verizon, a company who has experienced surprising growth in a mobile market where some 99 percent of the available customer base is already locked into some sort of wireless contract and who has grown a strong digital entertainment division with its Fios brand, struggles with the backbreaking subsidy costs of the iPhone, it certainly explains why so few others can even go near Apple—although they all wish they could of course.

So the question remains, if the iPhone destroys profit margins why carry it at all? Since AT&T first experienced the subsidy doldrums three years ago during the glory days of its iPhone exclusivity, the company promised that over time profit margins would return to normal and revenues would rebound (they haven’t).

Today most carriers have translated AT&T’s initial explanation into a Pay Now, Profit Later strategy that sees them swallow the initial losses with a long-term plan that they will recoup those subsidy costs through long term data contracts…or at least that’s how Verizon and others sell such losses to investors.

There are some, however, who aren’t so optimistic about this long-term strategy, pointing to the fact that most customers in the modern mobile market are trapped in an endless upgrade cycle, dumping their “old” phone whenever a new one is released. This cycle means, for carriers in particular, that stiff subsidy fees for particular phones will never be recouped because subscribers won’t use them long enough. In fact, due to the endless string of Apple upgrades carriers may never see that fiscal rebound, and it’ll be interesting to see what happens with the iPhone when they figure that out.

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Written by: Matt Klassen. Follow by: RSS, Twitter, Facebook, or YouTube.

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iPhones subsidy hits Verizon in Q4 2011 | Vision Consulting Services K.K.
January 26, 2012 at 5:45 am

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