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The iPhone May Prove a Costly Prize for Verizon

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News Posted: Tue, Jan 11 2011 9:21 AM
Nearly four years of pent-up demand by users who wanted a Verizon iPhone means Verizon is bound to sell millions of the devices. That success may not exactly be a good thing for Verizon, at least short-term: the subsidies involved may be so high as to cut significantly into Verizon's profits.

According to a Bloomberg report, Verizon may spend as much as $3 billion to $5 billion the first year it has the iPhone, in subsidies. Carriers pay subsidies to device manufacturers to reduce the cost of devices to consumers, which is why they ask consumers to sign up for service contracts.  Consumers who choose to buy phones without a contract see the "true cost" of the device.

While the company will make that back from the service contracts folks will have to sign up for, it will take some time for that to happen.  In fact, James Ratcliffe, an analyst at Barclays Plc in New York, estimates Verizon will sell at least 9 million iPhones this year. He assumes a subsidy of about $350, which would mean Verizon would  pay $3.2 billion in subsidies this year.

Meanwhile, John Hodulik, an analyst at UBS AG. Hodulik said Verizon may sell as much as 13 million iPhones. He estimates a $400 subsidy, which would come to a total of $5.2 billion.

Hodiluk believes that Verizon will add 2.1 million new subscribers this year, surpassing its largest rival, AT&T for the first time since 2008 (which, coincidentally, was the year the iPhone 3G went on sale). AT&T is estimated to only add 650,000 subscribers in 2011.

It takes AT&T about six months to make back the cost of the iPhone from customers’ data plans, iSuppli’s senior analyst for wireless communications, Tina Teng told Bloomberg. Given that Verizon will most likely pay the same price as AT&T for the smartphone, Verizon's profits for the first two quarters should be most affected.

Holulik believes the first-year loss will reduce earnings-per-share from Verizon from $2.26 last year to $2.20 in 2011.
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kid007 replied on Tue, Jan 11 2011 4:45 PM

Long term investment always pay off, at least I will finally stop reading about how everyone wants the iphone to go to verizon! Hopefully i will not start seeing people moaning and b^%$&%^$%^ about how verizon and at&t both sucks because they can't grip the phone right or because facetime will not work because of the software bug in the front camera!

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Super Dave replied on Tue, Jan 11 2011 10:46 PM

I have Verizon and I like it very much. I sure do hope the new traffic doesn't cause any problems with my wonderful service!Big Smile

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rapid1 replied on Wed, Jan 12 2011 1:41 AM

I guess I am lucky really as pretty much all cellular providers seem to have decent service where I live. For some reason my specific address seems to be in a cellular hole though. I get great service 50 yards from my house, but even Verizon which does get signal in my house has weak signal. Sprint who within 150 yards of my house has full Wimax service did not in October at least have decent service in my house which is weird.

Enough of my whining about carriers though. I think the draw to Verizon which is already the largest provider in the US even if by a smaller amount, is still the largest. This iPhone deal will bring more to them for two reasons I see the first is At&t customers who are unhappy, the next because they have always heard At&t had service issues with it, but they still wanted one, I guess it will also add some more "COOL" to Verizon in that regard as well.

From what I know they have been beefing up here for a couple years, not that I have ever really dropped any large number of calls with them in Atlanta anyway. So those who say they will have issues like At&t did I think are also wrong, but we will see won't we.

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ice91785 replied on Wed, Jan 12 2011 10:26 AM

I think everyone here has pretty much said it. Regardless of how much Verizon has to pay in subsidies, they will be getting [potentially] millions of new customers to jump-ship. Keeping in mind, customers not only pay monthly fees but imagine just the "extra" earnings VZ can make in all the iPhone accys they will sell as well!

Everyone here knows that iPhones aren't just for making phone calls...people integrate the things into their everyday lives. In short, even though VZ is paying a fistful of money back to Apple I am guessing their financial analysts probably figured out they are still going to "come ahead" in the deal...

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rapid1 replied on Wed, Jan 12 2011 12:27 PM

That is funny "come ahead" really. If you have 2 major competing companies just like standards, and there is a major acquisition (IE: Bluray/HD, VHS/DVD, Tape/CD) in technology one often becomes a standard. Where this differs is these are access providers, so be that as it may, one of them is going to come out with a victory.

While this is different in many aspects, in some it is the same such as who provides better and faster throughput. That is the big reason for all the listed technology/quality formats, and the subsequent product winning or loosing. These are access/signal companies though, and be that as it may with Big Red being 10-20% higher in user's already a gain of another 10% can and probably will be a big thing. I know At&t is trying to shrug it off and say it is nothing, I also know they have some nice i/smart phones on there shelf as well, but generally Verizon has answering products for it.

These are things like the Atrix and Bionic both which use very similar technology in general on (Atrix) has a gig of DDR from what I am hearing, but I am also hearing the Bionic has 512Mb of DDR2. So a general user will see the bigger number and say it will be better, but DDR2 will basically operate at twice the speed of standard DDR therefore handling twice the amount of data throughput. In the end 1Gb will be visually more impressive, but in operation roughly the same as 512Mb of DDR2. Either way this will be interesting to watch between these two, and all the smaller competitors will need something to somewhat match as well.

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