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Does This Mean Verizon Is Desperate?

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When is a good deal a bad sign for investors? When a new and highly functional handset is downgraded to the equivalent of bait in order to bring in subscribers. (Nasdaq: AMZN  ) , already poised to undercut Netflix in video streaming, is selling Samsung's Galaxy Nexus smartphone for $99 to those willing to sign up for new Verizon (NYSE: VZ  ) service. (Upgraders are eligible only for the standard upgrade rate -- $259.99 as of this writing.)

Anyone else wonder what this says about Big Red? Earlier this week, the carrier reported worse-than-expected profits and troubling margin trends driven by subsidy spending to win customers to its iPhone and Android handsets. Now, it seems, there's plenty more spending required.

The Galaxy Nexus doesn't come cheap. Try to buy the 16-gigabyte version of the device without a contract at Amazon and you'll pay at least $656. Try buying directly from Best Buy and you'll pay even more: as of this writing, $799.99. Verizon could end up spending hundreds of millions more just to boost its smartphone subscriber rolls.

No doubt some investors will cheer the move, noting that AT&T's (NYSE: T  ) early commitment to subsidize iPhone purchases has made for big, if inconsistent, profit increases in the years since. How inconsistent? Adjusted earnings fell $0.09 in 2011, to $2.20 a share, as costs to subsidize the new iPhone 4S bit into its wireless service margins.

So while Verizon's move to subsidize the Nexus isn't unusual, the size of the payout is. Big Red is giving subscribers what amounts to a $100 discount on the cost of the latest wireless gear -- the lowest end iPhone 4S goes for $199 -- in order to keep AT&T and Sprint Nextel at bay. It's the latest in a wireless war that, if it continues like this, promises deep -- and lasting -- casualties among carriers. Be careful not to let your portfolio get caught in the crossfire.

Besides, you needn't bet on any single carrier to take advantage of the post-PC world emerging around us. The Motley Fool recently honed in on a handful of alternative ideas in a free report entitled "The Next Trillion Dollar Revolution." Thousands have already requested the study, which is available for a limited time. Get your copy before this offer expires by clicking here -- the research is 100% free.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Netflix at the time of publication. Check out Tim's Web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of and Best Buy. Motley Fool newsletter services have recommended buying shares of and Netflix; and writing covered calls in Best Buy. 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.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 28, 2012, at 3:44 AM, stef333 wrote:

    The Nexus is available for $299 with a two year contract, not $99.

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