IPHONE SQUEEZES US PHONE CARRIERS' MARGINS

New York
The Economic Times

Profits at the three largest US phone carriers are being squeezed by steep discounts on advanced cell phones, triggered by AT&T Inc's hefty subsidy for the iPhone.

AT&T, Verizon Communications Inc and Sprint Nextel Corp are expected to show a drop in wireless profit margins when they report third-quarter results in coming weeks, also feeling the pinch from consumers holding off on buying add-on services like data to lower their phone bills in the weak economy.

Wireless carriers have always shouldered part of a phone's cost to persuade customers to sign longer-term contracts, but US market leader AT&T lowered the bar when it helped Apple Inc launch the latest iPhone for only $200 on July 11.

This forced Verizon Wireless, AT&T's biggest rival, and Sprint, the No 3 US mobile service, to follow suit with higher subsidies on their advanced phones, analysts said. While that helps boost service revenue in the longer term, it hurts near-term profits.

"The derivative effect is lower profitability in wireless for all the carriers," said UBS analyst John Hodulik, adding that the iPhone is selling faster than he expected, which is actually bad for AT&T's profitability in the short term.

"Subsidies have been creeping up anyway but the new iPhone and the efforts to defend against it have likely brought it to a new level," he said.

AT&T, which reports results on Wednesday, is seen as the worst hit, with JPMorgan analyst Michael McCormack forecasting what he called a "shocking" drop in its mobile profit margin to 36.1 percent in the third quarter from 41.2 percent in the second quarter. He estimates that AT&T will depend on wireless for about 45 percent of 2008 operating income.