The iPhone Claims Its First Victim

The high cost of subsidizing the iPhone, which has done more to fill Apple's (Nasdaq: AAPL  ) coffers than those of this country's major mobile carriers, has just taken a bite out of one mobile executive's wallet. Sprint Nextel's (NYSE: S  ) CEO Dan Hesse has agreed to take a $3.25 million pay cut as his reward for bringing the iPhone to Sprint's lineup.

Hesse envisioned the iPhone as his team's clean-up hitter, but the $15.5 billion that Sprint agreed to pay Apple over four years was difficult for Sprint investors to swallow. The iPhone did indeed attract more customers to Sprint's ballpark, but for every iPhone the carrier sold, the thinner its profit margin became. Shareholder angst, along with a growing concern over high executive compensation throughout the corporate world, persuaded Hesse to give something back to the company.

"I do not want, nor does our compensation committee want, to penalize Sprint employees for the company's investment with Apple," Hesse wrote to Sprint's HR department.

Sprint Chairman Jim Hance filed this with the SEC: "We applaud Dan for his willingness to sacrifice personal compensation in order to reduce any distractions that could negatively affect the morale and performance of the company. Dan enjoys the full support of our board of directors."

It wasn't long ago that Sprint was actually giving Hesse a bonus for meeting the company's goals. But the compensation committee explicitly said that Sprint's  "incentive plan targets for 2011, and the 2011 operating budget, did not include the impacts on our financial results of offering the iPhone."

It should have been no surprise that getting the rights to carry the iPhone would be a Faustian bargain. Both AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) have been watching their profit margins shrink with each of the must-have smartphones they sold. The latest figures from Wireless Intelligence show the iPhone outselling Android phones at the major U.S. carriers by 2-to-1. At that rate, will we be seeing any other wireless CEOs with lighter wallets?

Whether the carriers sell iPhones, Android phones, or phones running Windows Phone, there will always be a need for mobile devices -- and the parts that make them work. The Motley Fool has released a free report called "The Next Trillion-Dollar Revolution. Don't miss out on this report. Get it today!

Fool contributor Dan Radovsky owns shares of AT&T. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of 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 opinions, 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 (7) | Recommend This Article (12)

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  • Report this Comment On May 07, 2012, at 7:17 PM, xmmj wrote:

    "It should have been no surprise that getting the rights to carry the iPhone would be a Faustian bargain. Both AT&T (NYSE: T ) and Verizon (NYSE: VZ ) have been watching their profit margins shrink with each of the must-have smartphones they sold."

    However, they do make it up in the end. Remember they get $15 - $30 per month for the next 2 years plus a LOT LESS churn. So, even $15/mo = $360 which is about the subsidy. On $30 they make $720 - almost double the subsidy. This is why you do not see ATT screaming to stop the iPhone.

    Not so Faustian in the end. It just takes an upfront investment - painful as it is.

  • Report this Comment On May 07, 2012, at 7:34 PM, notgoing2argue wrote:

    I think Sprint will be doing much better in a year or so after a bunch of people on AT&T and Verizon switch to Sprint for the Unlimited data plan. AT&T instituted their "we're going to screw you out of your unlimited data plan" strategy and they will pay for it in subscribers. The attraction of having an iPhone is having an entertainment device in your pocket. When AT&T throttles you at 3G to the point of not being able to download your emails and you're paying for an unlimited plan, you get pissed and there's nothing they can say to keep you. It costs very little to switch to Sprint for their unlimited plan if your AT&T contract is up. Just watch Sprints smartphone subscriptions skyrocket over the next year as people move their business over there for the dataplan. I don't care how much slower Sprint's network is because AT&T's is even slower when you're throttled after hitting the 3 gig wall.

  • Report this Comment On May 07, 2012, at 8:18 PM, conradsands wrote:

    The fact remains that Sprint is the only U.S. carrier to offer new and existing customers the iPhone experience with unlimited data plans starting at $79.99 per month. An investment writer recently summed it up best: “Sprint now offers the best value proposition for a new smartphone user. I got my first smartphone on Sprint because a new AT&T or Verizon data plan, without being grandfathered in with an earlier, lower price, is outrageous. My plan includes 450 afternoon mobile-to-landline minutes, unlimited other minutes, and unlimited texting and data for $79.99. Unlimited AT&T or Verizon plans would have approached $150, and to get a comparably-priced package, I'd have to settle on limited data or texting plans, which I'd have to constantly try to not blow through. Why get a smartphone if you can't have fun using it?”

    Sprint also tied for the number one spot among major wireless carriers for customer satisfaction, according to results from the 2011 American Customer Satisfaction Index.

  • Report this Comment On May 07, 2012, at 8:21 PM, HSprague wrote:

    The fact remains that Sprint is the only U.S. carrier to offer new and existing customers the iPhone experience with unlimited data plans starting at $79.99 per month. An investment writer recently summed it up best: “Sprint now offers the best value proposition for a new smartphone user. I got my first smartphone on Sprint because a new AT&T or Verizon data plan, without being grandfathered in with an earlier, lower price, is outrageous. My plan includes 450 afternoon mobile-to-landline minutes, unlimited other minutes, and unlimited texting and data for $79.99. Unlimited AT&T or Verizon plans would have approached $150, and to get a comparably-priced package, I'd have to settle on limited data or texting plans, which I'd have to constantly try to not blow through. Why get a smartphone if you can't have fun using it?”

    Sprint also tied for the number one spot among major wireless carriers for customer satisfaction, according to results from the 2011 American Customer Satisfaction Index.

  • Report this Comment On May 07, 2012, at 8:27 PM, pablo007 wrote:

    What's better? Thin profit margins or no profit margin at all? ie. if they didn't have the iPhone, they'd be losing customers. Plus, I don't think the profit margins of the wireless companies are in any danger. Just look at the crapload of money that AT&T and Verizon both made recently.

    AT&T in the recent quarter made $3.6 BILLION. In PROFIT. And that's with close to 80% of their smartphones sold iPhones. They're not exactly hurting. I don't know where all this talk about these wireless companies struggling for profit comes from. They seem to be doing just fine.

  • Report this Comment On May 07, 2012, at 9:40 PM, motleyinfo7 wrote:

    Hess has absolutely cannibalized Sprint profit margins first with the Sprint unit with the iPhone eating up the more profitable Android customer base.

    Next the Sprint Prepaid Group which has reduced distribution greatly to the point where they have written off their own revenues with shrinkage of their outlets. Those dealers that are no longer carrying Boost and Virgin products are now carrying Simple Mobile ( http://www.simplemobile.it) flipping current Boost / Virgin customers over where they can use their existing Sprint phones and migrate over to no contract plans for just $40 a month for unlimited talk, text and web.

    Hesse's bad decisions are costing the company big time and finally the board has recognized it with them trumping and slapping Hesse across the face and spanking him like a fat 4 year old kid when blocking the metropcs merger.

  • Report this Comment On May 08, 2012, at 9:40 AM, youngblood58 wrote:

    Hesse is one of those left-over execs from the crisis days who needs to receive a pink slip. His reactionary strategies haven't paid off for Sprint, and the fact that he keeps making millions should make investors angry.

    The anti-Apple in some respects. The execs keep getting rich, while the investors are left with losses to endure.

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