Wireless carriers hope to temper iPhone 5 margin pain

NEW YORK/SINGAPORE Sat Sep 22, 2012 4:31pm IST

An iPhone5 is displayed at an Apple Store in San Francisco, California, September 21, 2012. REUTERS/Noah Berger

An iPhone5 is displayed at an Apple Store in San Francisco, California, September 21, 2012.

Credit: Reuters/Noah Berger

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NEW YORK/SINGAPORE (Reuters) - For mobile service providers like AT&T Inc, it's not enough that consumers came out in droves to buy the newest iPhone from Apple Inc.

They need people to dig more deeply into their wallets each month to pay for data services, such as mobile video, to cushion the impact of the iPhone's steep price tag on the carriers' bottom lines.

Wireless service operators typically subsidize the cost of smartphones, offering discounts to consumers to lock them into two-year service contracts. But the iPhone subsidy is as much as 60 percent higher than subsidies for Android smartphones, according to Barclays analyst James Ratcliffe.

He estimates the iPhone subsidy at about $400, compared with $250 to $300 for other smartphones. That means iPhone customers only start to become profitable for carriers about nine months after they buy the device, compared with a five- to six-month timeframe for other smartphones.

As a result, mobile operators' profit margins usually suffer in the months after an iPhone launch, when sales volumes are highest.

"We always say an Apple a day keeps the profits away," Neil Montefiore, chief executive of Starhub, said during the Singapore wireless service provider's August earnings conference call.

Be that as it may, mobile operators around the world still want to sell the iPhone because it helps retain subscribers and attract new ones. Apple is the only phone maker whose product launches are a cultural phenomenon -- on Friday, fans from all over the world queued around city blocks to get their hands on the new iPhone 5.

In Australia, service providers are trying to minimize the financial hit by varying the iPhone's price so that customers who pay more for data services get a bigger subsidy.

In the United States, carriers have changed their policies to make customers wait longer for a subsidized upgrade and levied new fees, after Verizon Wireless, AT&T and Sprint Nextel Corp suffered dramatic declines in profit margins based on earnings before interest, tax, depreciation and amortization (EBITDA) as a percentage of service revenue in the fourth quarter of 2012, when the iPhone 4S was launched.

Analysts expect the changes to help the operators, but they still forecast a drop in EBITDA margins. AT&T's margin is expected to fall from 45 percent in the second quarter to 40.8 percent in the third quarter and 35.7 percent in the fourth quarter, according to four analysts contacted by Reuters.

Verizon's margin is expected to fall from 49 percent in the second quarter to 47.4 percent in the third quarter and 43.6 percent in the fourth quarter, according to the same analysts.

FASTER PHONE

Service providers have high hopes that consumers will spend more on mobile data with the iPhone 5, saying services like video should work better on the new phone, which can support data speeds about 10 times faster than the previous model.

"That's the hope," said Guggenheim analyst Shing Yin. But he said "it's unproven" and there is no reason to assume iPhone 5 customers will use any more data than people using cheaper rival devices that support the same high-speed technology.

Singapore's biggest mobile operator, SingTel, said that its iPhone 5 orders were already exceeding previous iPhones because of the new gadget's higher speeds.

"From a financial standpoint, people who use this device tend to use more of it," said SingTel digital executive Allen Lew.

China Telecom is also banking on iPhone users spending more money on their telecom services. China's third-largest mobile service provider had to raise its subsidies by 50 percent when it started selling an older iPhone in February. As a result, its EBITDA profit margin fell 4 percentage points in the first half of the year to 38.5 percent compared to the same period the year before.

While Apple has not yet announced its China launch plans for the iPhone 5, China Telecom expects continued pressure on its bottom line from the iPhone but hopes the devices will help boost revenue per user in the long run, a executive for the operator said.

"Our subsidies level will remain pretty high at least for this year," said the executive, who did not have permission to speak to the media and declined to be identified. "We know we'll have to invest more initially."

Many operators feel they have no choice but to offer the iPhone because of its popularity.

"It's kind of like dancing with the devil. It's a blessing and a curse," said Wells Fargo analyst Jennifer Fritzsche.

(Additional reporting by Tarmo Virki in Helsinki, Harro Ten Wolde in Frankfurt, Leila Abboud in Paris, Jane Wardell in Sydney, Kevin Lim in Singapore, Maki Shiraki, Reiji Murai and Tim Kelly in Tokyo and Lee Chyenyee in Hong Kong; Editing by Bob Burgdorfer)

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