REPORT: The iPhone Is A Nightmare For Carriers - Spokane, North Idaho News & Weather KHQ.com

REPORT: The iPhone Is A Nightmare For Carriers

NEW YORK (CNNMoney) -- The price of Apple's (AAPL, Fortune 500) iconic smartphone is heavily discounted by carriers. Those subsidies almost single-handedly devastate profit margins for Verizon, AT&T and Sprint.

Since Apple's iPhone debuted on Verizon's network in February 2011, Verizon's "EBITDA service margin" -- a closely watched metric that carriers use to measure their core profit as a percentage of their sales -- has tumbled.

Between 2009 and 2010, Verizon (VZ, Fortune 500) averaged EBITDA service margin of 46.4% per quarter. In the first quarter that the iPhone went on sale, that fell to 43.7%. Last quarter, when Verizon sold a record 4.2 million iPhones, its margin plunged to 42.2%.

Verizon had just one "good" stretch this year: the third quarter, when its margin bounced back up to a record 47.8%. That's the same quarter in which iPhone sales stalled, as customers waited for Apple to unveil its heavily anticipated new model.

AT&T (T, Fortune 500) and Sprint suffered an even worse fate. AT&T posted a stunning 28.7% EBITDA service margin last quarter, compared with 37.6% a year earlier. One contributing factor: AT&T sold nearly twice as many iPhones as Verizon last quarter.

After selling nearly 2 million iPhones last quarter, Sprint's adjusted wireless margin fell to 9.5%, down from 16% a year ago. The company said Wednesday morning that its margin was nearly 9 percentage points lower than it would have been due primarily to the iPhone.

Those swings are a big problem in an industry where tiny, fractional changes in margin can cause investors to either throw temper tantrums or ticker-tape parades.

"A logical conclusion is that the iPhone is not good for wireless carriers," says Mike McCormack, an analyst at Nomura Securities. "When we look at the direct and indirect economics that Apple has managed to extract from the carriers, the carrier-level value destruction is quite evident."

Other analysts agree. Kevin Smithen of Macquarie Securities said that he expects iPhone sales to continue to grow beyond Wall Street's expectations this year.

"We think the subsidies from these sales will continue to impede margins," Smithen said, who expects AT&T's EBITDA service margins to fall for the fourth straight year.

All smartphones weigh on carriers' margins, since wireless carriers pay a hefty subsidy up front to buy the phones from the handset manufacturers. They make up the difference over the life of a two-year contract.

But the subsidies on the iPhone -- roughly $450 per device -- are the highest in the industry. AT&T's subsidies are even more exacerbated because it gives away the iPhone 3GS for free.

Sprint (S, Fortune 500) revealed in October just how onerous those subsidies can be: The company said it 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. click here to read more

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