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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.
Amazon.com (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.
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