Carriers ponder Apple iPhone subsidy uprising: Will it work?

Summary:Verizon and AT&T are trying to diversify their smartphone bases so they aren't too dependent on the iPhone. Will smartphone buyers play along?

Verizon wants a third OS platform badly. So badly that it's open to pushing Windows Phones hard to diversify its handset---and subsidy---base.

The elephant in the post-paid wireless subscriber room: Apple's iPhone. Apple commands hefty subsidies on the iPhone and carriers play along at the expense of margins. But a funny thing happened on the way to iPhone euphoria: Carriers are realizing they can't become too dependent on Apple if they want to grow earnings. The challenge: Despite their best efforts carriers are heavily skewed to Apple's iPhone.

But the data points are adding up that there's a little pushback from carriers. To wit:

  • AT&T has launched Nokia's Lumia 900 with a lot of fanfare. The results in the U.S. have been solid relative to other markets. Why is AT&T on the Windows Phone and Nokia bandwagon? AT&T is known as the iPhone carrier. It would like to broaden its footprint after a belated move to Android devices didn't quite pay off.
  • Verizon got its iPhone once AT&T's exclusive ran out, but pretty much led the Android army as new devices launched. Android also led the 4G LTE charge at Verizon. Today's problem: The company sold 3.2 million iPhones in the first quarter to trump the 2.1 million 4G LTE smartphones sold. That's a big problem for Verizon. Apple's iPhone is low margin and on a 3G network that's less efficient. When the iPhone goes LTE, more lucrative Android handsets may be pushed away. The Apple subsidy is likely to offset any cost savings from moving customers to LTE.

As CNET's Roger Cheng noted, Verizon CFO Fran Shammo placed the company on the Windows Phone bandwagon. Shammo said on Verizon's first quarter conference call:

On the Apple iPhone, we look at every individual handset. We have a broad portfolio. We manage it handset by handset and manage our subsidy. This is just one aspect of our P&L and this is just a nature of this business. I do think though it is important that there is a third ecosystem that is brought into the mix here, and we are fully supportive of that with Microsoft. We created the Android platform from beginning and it is an incredible platform today that we helped to create, and we are looking to do the same thing with a third ecosystem.

Now Verizon isn't exactly hurting. The company reported earnings of $1.69 billion, or 59 cents a share, on revenue of $28.46 billion. Those results topped earnings estimates by a penny. AT&T will also rake in gobs of cash when it delivers its first quarter results.

The wild card in the iPhone subsidy saga may be Sprint. It has bet the ranch on Apple and the iPhone just as other carriers are looking to diversify. Sprint will be quite the business school case study in the years ahead. Sprint's iPhone bet will either pay off big time or kill the company. There's not much in between.

Now the big question here is whether carriers can force new handsets on consumers and enterprises, two user groups betting on the iPhone. Even if carriers diversify and line up a sales army it's unclear that they can slow Apple's momentum.

One thing is certain though: Carriers are going to try to put the iPhone in its place. BTIG analyst Walter Piecyk downgraded shares of Apple last week based on carrier pushback on iPhone subsidies. The downgrade was dismissed for the most part since $1,000 stock price calls are more common, but maybe Piecyk is on to something. If Verizon and AT&T can use their marketing might to push Windows Phone he may have a point.

Topics: Verizon, Apple, AT&T, Hardware, iPhone, Mobility, Smartphones

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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