Verizon Looking for a Hit, Not a Home Run, With iPhone 4S Release
Oct 4th 2011 4:45PM
Updated Oct 4th 2011 4:54PM
With the iPhone 4S, Verizon Wireless is expected to gain its long-awaited level playing field in its battle with AT&T (T) over iPhone sales. For the first time, Verizon will be allowed to simultaneously roll out the latest version of the iPhone with AT&T.
But for Verizon Wireless, a joint-venture with Verizon Communications (VZ) and Vodafone Group (VOD), the carrier is apt to aim for a solid hit rather than a home run with Apple's (AAPL) iPhone 4S, analysts say. And for investors, that's a good thing.
Wait Six Months and the Check Will Clear
Carriers initially lose money on every iPhone sold under a subsidized subscription plan. Based on an $80 per month service agreement that typically spans two years, it takes carriers more than half a year to cover their costs to Apple, says Peter Rhamey, an analyst with BMO Capital Markets.
As a result, investors won't likely see Verizon going hog wild to acquire a mass of iPhone 4S subscribers.
"I would be surprised to see Verizon sacrifice [profit] margins to build their subscriber base," Rhamey says. "Verizon takes a more balanced approach to selling high-end devices and likes to maintain a 45% margin. AT&T takes a more aggressive stance and is willing to let their margins drop to increase subscribers."
Sprint's Bigger Bet
The nation's third largest carrier, Sprint (S), is reportedly betting the bank on getting access to the new iPhone: According to a Wall Street Journal report, Sprint is looking to sell 30.5 million devices and doesn't expect to post a profit until 2014.
Based on unit shipments, Verizon will underperform AT&T not only because it wants to maintain its profit margins, but also because AT&T has a larger installed base of iPhone users given its prior exclusive arrangement with Apple, which lasted until February, when Verizon came on board.
"We estimate AT&T has about 20 million iPhone users and at any time about a third are eligible for any upgrade," Rhamey said.
Motley Fool contributor Dawn Kawamoto does not own any shares in companies mentioned in this article. She is, however, an AT&T customer and lover of smart phones. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Vodafone Group, Apple, and AT&T. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.