AT&T Confirms Verizon's Theory: iPhones Hurt

What's good for the goose is most certainly not always good for the gander.

Before its after-hours earnings report, shares of Apple (Nasdaq: AAPL  ) plunged, shaving about $9 billion off the world's largest market cap. The culprit is formerly staunch Apple partner AT&T (NYSE: T  ) , whose own shares rose 4% on a terrific earnings report.

Yeah, you read that right: AT&T's good news is bad for Apple. Ma Bell beat analyst estimates in the first quarter, with earnings of $0.60 per share on $31.8 billion in sales. Margins expanded nicely, in part thanks to fewer iPhone sales than expected. AT&T sold a record number of smartphones, but the 4.3-million-iPhone haul left many analysts scratching their heads.

Wham, bam, thank you, Apple
Isn't it obvious, though? Verizon (NYSE: VZ  ) reported similar trends last week, leaning less on Apple sales and reaping the margin rewards. AT&T has changed its marketing tactics and now treats a Windows phone by Nokia (NYSE: NOK  ) as the smartphone to end all smartphones -- and that model comes with far smaller subsidy costs than the iPhone. that model comes with far smaller subsidy costs than the iPhone. 

So AT&T and Verizon have found a magic bullet to boost their bottom lines, and it involves selling smartphones with stronger margins for the carriers. Imagine that -- the gatekeepers of mobile services could benefit from selling more profitable products. I think they just might do more of that from now on. The mobile networks have milked Apple for consumer attention for a few years, and now they're ready to move on to more profitable pastures.

From bad to worse
Apple can react to this obvious trend in two ways:

  • Stay the course on pricing and hope that consumers seek out the iPhone even without marketing help from the network providers. Or …
  • Ship out phones with a smaller price tag, putting Apple's profit margins more in line with what Samsung or Motorola Mobility (NYSE: MMI  ) would make from each handset sold. Yes. Motorola and Sammy make money on their handsets. But their margins are far thinner than Apple's. By some estimates, Apple currently reaps 80% of all profits in the handset market despite relatively modest market share measured in revenue and units.

The first option is an exercise in futility. Just look at Nokia's presence in the American market, where the Windows-based Lumia 900 is the first Nokia smartphone to get a helping hand. You might need a microscope to find the Finnish carrier.

The second choice would puncture Apple's biggest cash cow right away. iPhone profits would start moving out of Cupertino and into the coffers of network carriers. Either way, I think this is the beginning of the end of Apple's astounding cash machine. Even if the next iPhone update turns out to be a stunner, the easy road to riches is filling up with brambles and beasts. This is great news for telecom investors and not so good for Apple owners. And there's nothing Apple can do about it, since the carriers hold all the cards.

Adding insult to injury, the telecoms also treat their investors with more respect. AT&T spent $4.7 billion on dividends and share buybacks this quarter, for a dividend yield of 5.7% and an annualized direct return of cash to shareholders of $18.8 billion. That leaves Apple's recent promise of returning $15 billion a year to shareholders looking stingy, especially in the light of Apple's seemingly bulletproof cash flows. Learn more about rock-solid dividend stocks in this free report, including a detailed rundown of AT&T's generous policies. But the report won't be free much longer, so grab yours right now.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Nokia and Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (11) | Recommend This Article (8)

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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 April 24, 2012, at 10:33 PM, millsbob wrote:

    "The first option is an exercise in futility."

    right. well, the quarterly earnings call certainly proved That, didn't it, Anders? not.

    i made Another $35,000 today on AAPL after hours (approx, will need to wait and see the actual change in my call options tomorrow morning, but that's conservative).

    seriously, you Seem like a smart guy. are you Ever going to get this right?

  • Report this Comment On April 24, 2012, at 10:40 PM, kdeken wrote:

    He was allowing that this might be another good report, but I think this quote is accurate:

    "Even if the next iPhone update turns out to be a stunner, the easy road to riches is filling up with brambles and beasts. This is great news for telecom investors and not so good for Apple owners. And there's nothing Apple can do about it, since the carriers hold all the cards."

    Two facts: 1) Samsung has caught AAPL with their product; 2) the telecoms will push AAPL's competition to keep more profits

  • Report this Comment On April 24, 2012, at 10:46 PM, millsbob wrote:

    earth to Anders and kdeken: it is now 2012.

    you're reporting on the state of the telecomm industry 5 years ago, before the iPhone. which single-handedly dismantled that notion.

    saying that it's suddenly going to return to those days -- much less that Apple is helpless before the telecoms -- requires a little more than a bald-faced assertion.

  • Report this Comment On April 24, 2012, at 11:01 PM, skippy09 wrote:

    You're joking right? Surely this was written prior to Apple's earnings release. Don't you get it? The world, not just the USA is Apple's oyster.

    Doubt this stock at your own peril.

  • Report this Comment On April 25, 2012, at 12:06 AM, peto3 wrote:

    Hey Andy - like an ugly mutt with a chicken bone in its teeth, you and your fellow "journalists" just can't give it up, can you? Well, knock yourself out, then, and continue to demonstrate what small minded, pathetic jerks you are and choke on it. See ya, but wouldn't wanna be ya ...

  • Report this Comment On April 25, 2012, at 12:12 AM, Risky88 wrote:

    I don't think anyone is truly doubting the stock.

    When I think of apple I think of a technology company who went from almost bankruptcy to #1.

    I also think of RIMM doing the exact opposite.

    As of right now they are on top of the world and should feel pretty damn good.

    I always feel though that we forget that this is the technology field, things can change instantly, if you don't keep on your toes or at least pay attention to the world around you, could very well end up like RIMM or how GM was 3-4 years ago.

    As an investor for the long term I just feel like so many people are throwing all their cash into one.

    Everyone always says "oh that could never happen" To me its happened to many to, to many other companies.

    I can't image what would have happened to apple say only made 25 billion instead of the like 37 billion.

    great company but you should just always stay hyper vigilant for this reason.

    I see probably the greatest Revolution of my generation probably being robots, like in the movie irobot with will smith, in about 20 years. I back my theory up by saying where were computers 30 years ago compared to today.

  • Report this Comment On April 25, 2012, at 12:57 AM, jimbotomy wrote:

    So wait a second. Let me get this straight. Verizon activates 3.2 million iPhones out of 6.3 million smartphones total. AT&T activates 4.3 million iPhones out of 5.5 million smartphones. Over half of Verizon's smartphone sales are iPhones and about 3/4ths of AT&T's smartphone sales are iPhones. Heck, about 60% of AT&T's PHONE sales are iPhones.

    And from this you're concluding that Verizon and AT&T are "ready to move on to more profitable pastures"?

    In what bizarro world does this make sense? The kind of world that said that APPL was a sell at $200 or the kind of world where the HP would kill the iPad, and APPL was the Worst Stock of 2010?

  • Report this Comment On April 25, 2012, at 2:15 AM, BWinski wrote:

    Well folks, you've not mentioned the THIRD option... BUILD YOUR OWN NETWORK.

    I'd gladly take your standard $ 1 bet that says you too can build your own network for $ 100 BILLION DOLLARS !

  • Report this Comment On April 25, 2012, at 10:30 AM, CluckChicken wrote:

    I think the Applites are missing the point. Sure the iPhone is nice and people will continue to buy it but why should AT&T or VZ keep subsidizing it to the extent that they are? All the telecoms that sell iPhones see shrinking margins and they all see that Apple is bringing lots of money, why would the telecoms not force a more reasonible deal?

  • Report this Comment On April 25, 2012, at 10:57 AM, jordanwi wrote:

    Am I missing something here? The contracts that are being signed are for 3 years. In 2009, 2010 and 2011 (and to a lesser extent in 2012) they ate the cost of subsidizing iPhones. Aren't what we seeing is AT&T now reaping the benefits of those subscribers on fat contracts? Ergo, aren't iPhone subsidies actually a good long term play for these telecom companies? It seems 'analysts' thinking of AT&T/Verizon customers as one-offs. I feel like I'm taking crazy pills.

  • Report this Comment On April 25, 2012, at 10:11 PM, skipper09 wrote:

    I've read a lot of rubbish on this stock but this article really stands out.

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