iPhone subsidies hurting wireless carriers

Subsidising the iPhone is proving to be the kiss of death for any carrier who touches it.

While we have reported before how AT&T did not do as well from the iPhone as many had expected, it turns out that the other telcos who subsidise Jobs’ Dream are also suffering.

CNN has looked closely at the effect that iPhone subsidising has had on Verizon, AT&T and Sprint and come to the conclusion that they would have been better off in a pact with Mephistopheles than cutting a deal with Apple.

Since Apple’s iPhone debuted on Verizon’s network in February 2011, Verizon’s EBITDA service margin, which measures their core profit as a percentage of their sales, has tumbled according to CNN.

In its pre-Apple days Verizon had a EBITDA service margin of 46.4 percent per quarter. In the first quarter that the iPhone went on sale, that fell to 43.7 percent. Last quarter, when Verizon sold a record 4.2 million iPhones, its margin plunged to 42.2 per cent.

Tellingly, Verizon did very well in the third quarter, when its margin bounced back up to a record 47.8 percent. This is the same quarter in which iPhone sales stalled.

AT&T has a 28.7 percent EBITDA service margin last quarter, compared with 37.6 percent a year earlier. AT&T sold nearly twice as many iPhones as Verizon last quarter.

Sprint sold two million iPhones last quarter, and its adjusted wireless margin fell to 9.5 percent, down from 16 percent a year ago.

Mike McCormack, an analyst at Nomura Securities, told CNN that the iPhone was bad for wireless carriers. If you look at the direct and indirect economics that Apple has managed to extract from the carriers, the carrier-level value destruction is quite evident, McCormack said.

All smartphones are subsidied to some extent but those on the iPhone are the highest in the industry. It is estimated that for every iPhone sold, the carriers have had to give Apple $450.

Sprint has committed to paying Apple roughly $15.5 billion in up front costs over the next four years, and the carrier does not expect to make money on the deal until 2015.

The hope is that somehow the companies will make money out of Apple, but everytime Cupertino has a success, the carrier’s results suffer.

At the end of the day, part of this problem is that they have refused to back away from their lock-in deals with Apple or at least force the company to be a little more reasonable. Apple has no reason to give way. An unsubsidised iPhone would have to be unlocked, and besides, it would cost about $800-$1000.