Apple Inc.(NASDAQ:AAPL)’s iPhone has always been a hit with customers, but as far as wireless carriers that host the phone on their networks, are concerned, the effect has been mixed. Wireless carriers are extremely eager for the launch of iPhone 5 as it means potential customers, but they will owe huge subsidy payments to Apple. AT&T Inc.(NYSE:T), Verizon Communications Inc.(NYSE:VZ), and Sprint Nextel Corporation(NYSE:S) will be the first ones to have the iPhone 5 in their stores, but it might mean hefty payments up to $425 per customer to Apple, after the customer signs an iPhone service contract spanning 2 years.
The latest iPhone is priced at $199 and it is compulsory to sign the contract. Subsidies are frequently paid in the wireless industry and the carriers make up those expenses over the period of the contract. But if the short term prospects are to be considered, then the popularity of iPhone 5 might prove to be very expensive for wireless carriers according to Brett Feldman of Deutsche Bank. Sprint has predicted that it might take them 3 more years to reap the benefits from iPhone 5.
If the iPhone 5 hits the floors right after its launch, then the carriers might make a decent profit in the 4th quarter, due to the initial rush taking place at the end of the 3rd quarter. But the figures of AT & T – the profit margins feel from 29.5% in the 3rd quarter to 15% in the 4th, last year. The loss comes to a staggering $2 billion.
Stifel Nicolaus analyst Christopher King has stated that the holiday shopping season might cause carriers to pump up $10 billion in subsidies due to the huge demand for iPhones. Verizon had about 4.3 million iPhone activations in the last quarter of 2011 and the wireless margins came to 42.2%. The figures increased in 2012 with 46.3% and 49% in the 1st and 2nd quarter respectively.
Steps are being taken to make wireless margins better, as stated by Mike McCormack of Nomura Securities. Present iPhone users have to wait for 20 months in order to upgrade their phones according to new prices. This measure has helped carriers to stop subsidizing a phone, which could have been upgraded before. The actual results will be more prominent next year when the upgrade rate will be more standardized.