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Yet again we have a demonstration that the lush profits that Apple is enjoying from the sale of its iPhones is having a bad effect on their customers, the American Telcos. In recent days we saw Verizon's margins drop over 500 basis points in the latest quarter as the result of iPhone sales.
Now AT&T has reported an even worse impact as its wireless service margins plummeted from 43.7% in the third quarter to just 28.7% for the fourth quarter. It also was forced to take a charge of $4 billion for payments to T-Mobile for the breakup up their proposed merger after extensive objections by both the FCC and the Justice Dept.
It is always the hope that by locking the customer into a two year contract you can sell him the phone at a subsidized price as a loss leader. Management did say promoting smart phones which use far more bandwidth than a phone that is primarily just a device for short text messages and, if you can imagine, phone calls. This is the short term pain, one hopes, that leads to the long term gain.
None of this bodes well for Sprint which is in a far weaker cash position than either AT&T or Verizon. Sprint has recently committed to a very expensive long term deal with AAPL in the hope it can stem its loss of customers and curtail its high churn rate. It now seems unlikely that it accomplished either of those goals in the fourth quarter.
Only Deutsche Telecom's T Mobile is not offering iPhones of the major carriers, probably because it expected to be subsumed by AT&T had they been allowed to merge.
Joan E. Lappin CFA Gramercy Capital Management
Neither Mrs. Lappin, Gramercy Capital nor its clients own any shares in the companies named in this article.
Unhappy with your investment performance. In these turbulent times, put our decades of experience to work for your portfolio. Contact us at: info@gramercapital.com. Follow Joan Lappin at twitter.com/joanlappin
