Is the iPhone Killing the Wireless Industry?

I am almost shocked that I feel this way, but I'm starting to get a little weepy for our country's wireless carriers. In a sense, they are the unsung heroes of our untethered telephony experience, laying out huge sums to build the latest in high-speed mobile networks -- and incurring massive debt in the process.

Yes, I know, when I look at my wireless bill every month, I, too, think that these guys must be making money hand over fist. But consider this: In 2010, the wireless industry spent $24.9 billion investing in infrastructure, according to the CTIA, an industry trade organization. But only two carriers were able to reap more from their network capital expenditures than the cost for that capital, according to Bernstein Research. It's probably no surprise that those companies are AT&T (NYS: T) and Verizon (NYS: VZ) . That leaves Sprint Nextel (NYS: S) , T-Mobile, MetroPCS, Leap (NAS: LEAP) , U.S. Cellular, and the rest wondering whether their efforts will ever get rewarded.

The iProblem
But even the profitable carriers are watching their margins getting shaved quarter after quarter, and though they know exactly where the money is going, they are powerless to plug the leak. Why? Because it happens to be caused by their single biggest marketing tool -- the iPhone.

Let's look at Verizon's iProblem. This week, the company announced that it sold 4.2 million iPhones in the fourth quarter, more than twice as many as in the previous quarter. Yet the company's profit margins dropped 5% quarter to quarter.

AT&T is not immune to this phenomenon. According to The Wall Street Journal, analysts predicted that the carrier's wireless profit margins for the fourth quarter would fall to a four-year low, even though AT&T said it would sell a record number of iPhones and other smartphones during that period.

Nomura Securities analyst Michael McCormack told the WSJ that AT&T's relationship with the iPhone has "really been a wealth transfer from AT&T shareholders to Apple shareholders."

But the iPhone is such a draw that carriers are willing to subsidize an estimated $400 of its purchase price each time a subscriber signs a two-year contract, hoping that customer will stick around.

Sprint was so desperate to get into the iPhone club, it agreed to buy $15.5 billion worth of the phones from Apple (NAS: AAPL) -- even if it can't sell them all. One could argue that without the iPhone, the No. 3 carrier would never have a chance of competing with the top two carriers. But on the other hand, such a commitment could doom the company anyway.

Data envy
And here's another conundrum that comes with the iPhone, as well as every other smartphone: how to charge for data usage.

Smartphones have created an increased demand on the carriers' networks to provide enough bandwidth for all the downloading and streaming to and from our mobile devices. But the iPhone 4S causes the biggest downdraft out there, and it's only slightly behind the HTC Desire S for gobbling up data, according to a study just published by Arieso.

To add to the carriers' data problem, the Arieso study also pointed out that 50% of all downlinking is done by only 1% of users. So the question is what to do about those little piggies. The Dow Jones Newswires reported that Sprint CEO Dan Hesse told an investor conference that the company deals with overly prolific downloaders by strangling their data bandwidth. So Sprint's solution is to be disingenuous about its advertised unlimited data plans. AT&T and Verizon deal with heavy data users by charging them more through a tiered pricing structure.

Is the tail wagging the dog?
If the iPhone makes it even harder for the wireless carriers to turn a profit, then why have it? T-Mobile may provide that answer. It doesn't carry the iPhone, and it lost 850,000 contract customers through September. Now, some of that may have been caused by other factors, such as theuncertainty over the merger with AT&T, but lack of the iPhone certainly didn't help.

I also can't help wondering what would happen if Sprint can't pay Apple for all those iPhones. Would Apple then take over Sprint and run its own mobile network? I love my iPhone, but I don't think that would be a good idea.

AT&T and Verizon have both been steady income payers for years. It would be a sad day if their profit margins should slip enough to force a decrease in dividend payouts. For some leads on other solid income producing stocks, please help yourself to this special free report from The Motley Fool.

At the time this article was published Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jeffrey

That would be awesome if Apple took over Sprint and started running their own mobile carrier :)

January 13 2012 at 8:40 PM Report abuse rate up rate down Reply