iPhones subsidy hits Verizon in Q4 2011

According to some of the numbers coming out of fourth quarter last year, it might look like telecommunications giant Verizon has hit some hard times. The largest wireless provider in the US reported a $2.02 billion loss in Q4 2011. However, Verizon attributes slumping margins to discounted iPhone sales and is staking its earnings on data services and a long term strategy.

Despite losses experienced throughout the period it was actually a period of surging revenues as their subscriber base saw significant increases. This is mostly due to increased iPhone sales over the holiday and customers wanting to distance themselves from the AT&T/T-Mobile fiasco. The company actually signed up 1.2 million wireless users, but posted losses spurred by increased expenses such as a hefty dose of pension costs. But the real culprit stems from the fact that Verizon actually sells the iPhone handset at a loss to encourage customers to buy two-year contracts. As a result, increased iPhone subscribers lessened Verizon’s profits, because Verizon absorbed most of the iPhone’s handset cost.

Verizon sees this as a “pay-now-profit-later” strategy and expects data sales and revenue from smartphone contracts to negate the costs it endures subsidizing handsets. The start-up costs for these contracts increases if users choose iPhones, but the profit margin will be ample as long as customers use data and complete their contracts.

Verizon anticipates a leap in data usage, illustrated by its decision to beef up its 4G service. The company is optimistic consumers will use increasing amounts of data, which will amp up data costs and give the company higher profit margins in the future.

According to forbes.com “Verizon’s future looks bright, despite its lackluster quarterly report. Still, the number of subscribers the company gained this year is expected to translate to larger profits in coming years.” (see Verizon Plans to Profit Off Data, Takes Hit from IPhone)

In regards this long-term business strategy, Matt Klassen of thetelecomblog.com is not so optimistic, “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.”

If a mobile giant like 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 – has to struggle this hard to absorb the subsidy costs of the iPhone then it explains why so few mobile service providers will go near Apple (even though they might really want to). When AT&T first experienced the subsidy burden three years ago it promised to rebound over time and that profit margins would return (but they haven’t).

It will be interesting to see the outcome here and certainly makes you wonder why any company would carry iPhone in the first place.

See “Verizon takes a hit from the iPhone” by Matt Klassen, and “Verizon Plans to Profit Off Data, Takes Hit from IPhone” at forbes.com

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