Is the iPhone 5 Great News for Telecom Companies?
Robbert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The new iPhone 5 seems to hit another iPhone sales record. Obviously, this is great news for Apple (NASDAQ: AAPL), the developer of this device. So, who else profits from the iPhone? It seems to make sense that the Apple iPhone 5 is a major boost for mobile phone operators who have an agreement with Apple: AT&T (NYSE: T), Verizon (NYSE: VZ) and Sprint (NYSE: S). Sprint’s stock price especially seemed to react positively to the fact it has (recently signed) an agreement with Apple to sell the iPhone, having been doubled in the previous 6 months. Sprint has been losing money every quarter for years now and this iPhone-money could turn this bad situation around.
Of course, those mobile phone operators see an increase in revenue as people switch to the iPhone while they might have had a cheaper subscription before. The 3 wireless providers can also increase their market shares as consumers switch to the iPhone.
To put these positive elements into perspective, 15.4% (Jun 2012) of all mobile phone subscribers in the US have an Apple phone. Also Sprint, Verizon and AT&T already have a combined market share of over 90% (2011) in mobile telephone service. So their biggest source of new revenue will be cannibalization of their own existing revenue. To make matters worse, the providers don’t charge their customers the full price for an iPhone when they sell one. The providers instead survive off monthly fees the subscribers pay. And of course it’s more profitable to providers to extend existing subscriptions instead of issuing a new iPhone subscription.
It’s difficult to compare the various telecom companies as their businesses differ greatly. Still, stock prices give a fair representation of value to shareholder, so let’s take a look. See graph below: it starts in 2008 when iPhone sales began to skyrocket. I added the Dow Jones U.S. Telecommunications Sector Index, which represents US based telecom operators (AT&T has a 52% weight in that index).
Although it seems like the telecom operators who carry the iPhone did better than their peers, they did not achieve great profits or outperform the S&P500. This could indicate the new reality in telecom-land; the iPhone sells itself so Apple gets the profits while the collaborating telecom companies are lucky to increase their market shares on equal profits while others feel the pain of the loss of market share. The performance of the telecommunication stocks is disappointing as the mobile phone market in the US increased by 4.1% annually from 2007-2012. This might lead to the conclusion that the manufacturers of smart phones profited most from this increase in mobile phone subscriptions. Verizon, which has been selling iPhones since its agreement with Apple in January 2011 didn’t have a significant increase in EPS which can be attributed to the success of the iPhone. Ok, iPhones accounted for 44% of the new Verizon subscriptions in 2011, with a pike of 55% in Q4. However nice this may seem, 2011 profit declined from 2010. In the Verizon Q4 2011 wireless segment, operating income margin declined YoY from 30.1% to 23.7%. I believe the margin pressure is the same for AT&T and Sprint, though more difficult to capture for those companies as AT&T's iPhone sales increased more gradually and Sprint has just started selling iPhones.
Market share data shows that the iPhone did in fact have a positive effect on AT&T following the launch of the iPhone in 2007. The net additions of subscribers reversed from negative to positive, with the positive trend lasting for years as iPhone sales increased. Still this is not the news Sprint needs, while it keeps building up losses.
In the end there are few who profit from the iPhone, Apple is of course the one who gained the most while its stock price increased from $200 on 01/01/2008 to $700 today. AT&T on the other hand, had just a modest positive yield when accounting for dividends. So the bottom line here is that the iPhone 5 is not the goldmine wireless providers would like it to be, the playing field is now leveled so AT&T and Verizon could lose a little market share to Sprint, but that’s it.
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