Are Verizon and AT&T Ready to Part with Apple?

Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) could be finding itself someday with a new iPhone and fewer places to go as Verizon Communications (NYSE: VZ) and AT&T (NYSE: T) are rumored to be looking to split.  Actions have been taken by each communications giant that certainly indicate that this is possible.

Even though the iPhone from Apple has been very rewarding for AT&T and Verizon Communications, the agreements have been very costly.  One analyst wrote about the possibility of a new relationship and why: "Because when it's all said and done, iPhones are very expensive for AT&T and Verizon to subsidize, perhaps almost to the point where they're not worth it. Indeed, if other smartphone manufacturers were to get just a tad closer to the iPhone on the 'cool' scale (and they're moving in that direction), it's conceivable that the iPhone's dominance could begin to wane."

Even though the future might not be as profitable, the past relationship with the iPhone certainly has been lucrative for Verizon Communications and AT&T.  While the Blackberry from Research-in-Motion (NASDAQ: BBRY) was the first smartphone, it was intended for a business audience.  The iPhone was the first consumer smartphone.

That opened a new income stream for Verizon and AT&T Communications.  Before the iPhone, there were no revenue generating features such as a data plan.  After the introduction of the iPhone, income soared for both AT&T and Verizon Communications.  Verizon Communications had a data revenue total $23.6 billion last year, up from $19.6 billion in 2010.  For AT&T, data plans contributed $6.1 billion in revenue for the first quarter of 2011, up from $5.1 billion for the same period the previous year.  For both AT&T and Verizon Communications, data revenue provides around one-fifth of the total revenue for each company.  More importantly for investors is that is has provided much of the revenue growth.

The second quarter earnings for AT&T beat estimates due to having fewer new subscribers for the iPhone, however.  For both Verizon Communications and AT&T, the more iPhones sold, the more money that is lost due to having to subsidize the customer purchases of each.  While Verizon Communications and AT&T subsidize most customer phone purchases, it is reported that an iPhone cost the carriers about 20% more to move off the shelf.  With the Blackberry 10 coming soon and the Windows Phone 8 from Microsoft Corporation (NASDAQ: MSFT), there is certainly no shortage of big name competition, particularly with the many offerings from Samsung, and Amazon supposedly coming out with a Kindle smartphone.

This high cost cuts very deeply into the margins of AT&T and Verizon Communications.  Both are low growth companies beholden to the high dividend income of each to attract investors.  It is certainly not the returns.  The return-on-equity for Apple is 44.32% and its return-on-investment is 38.27%.  Microsoft has a return-on-equity of 27.51% and a return-on-investment of 20.15%.  By contrast, for AT&T, the return on investment is 1.97% and the return-on-equity is 4.98%.  Verizon Communications has a return-on-investment of 7.91% and a return-on-equity of 7.5%.  Obviously, AT&T and Verizon Communications contribute to the superior return-on-investment and return-on-equity for Apple with each new iPhone sold.  That should not comfort the shareholders of either, particularly when earnings improve when less iPhones are sold.

In recent action, both Verizon Communications and AT&T have moved to make the iPhone more expensive and less attractive.  That does not seem like a salutary development propitious for a long term relationship.  In addition, along with the iPhone 5, there will be many more new smartphones hitting the market, with far more attractive terms likely from companies looking to supplant Apple. 

Verizon Communications and AT&T do not seem to believe that the iPhone and Apple are needed to grow and profit in a highly competitive market with many fine alternatives that are about to become even more so.  That was clearly demonstrated with the introduction of costlier new iPhone plans by each.  More steps like those by AT&T and Communications will be additional proof that a new relationship with Apple will be taking shape in future, in one form or another.




jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.If you have questions about this post or the Fool’s blog network, click here for information.

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