Analysts debate whether carriers will cut Apple's iPhone subsidies

If wireless carriers cut subsidies they pay Apple (NASDAQ:AAPL) to carry the iPhone, investors feel Apple's earnings and revenue will take a hit. That fear has been driving down Apple's stock recently, but analysts are divided over whether the cuts are a real possibility. 

The worries have driven Apple's stock down 12 percent since it peaked at $644 per share April 10. The debate also comes amid the first-quarter earnings season when Apple, which reports it earnings after the market closes today, and Verizon Wireless (NYSE:VZ), AT&T Mobility (NYSE:T) and Sprint Nextel (NYSE:S) reveal how many iPhones they sold and how their margins fared as a result.

Wireless carriers typically pay Apple a subsidy of $400 per iPhone and then sell the device for between $50 and $200 when paired with a two-year contract, hoping to make back the money they pay to Apple via monthly charges to subscribers. Yet Apple, analysts say, clearly has the upper hand, since rising iPhone data usage forces carriers to continually invest in their networks. Apple's growth has also crowded out other smartphone vendors, such that Apple captures only around 8 percent of the global handset market share but makes up close to 80 percent of handset operating profits. "The primary beneficiary of the growth in wireless data has been one company--Apple," William Power, an analyst with R.W. Baird & Co, told the AP.

Yet that could change if carriers cut their subsidies to Apple. In a research note to clients on Monday, BMO Capital Markets analyst Keith Bachman wrote that a $100 drop on the iPhone subsidy would dent Apple's earnings-per-share for fiscal 2013 by $7.50. "Broadly speaking, we believe that Apple shareholders have benefited from the growth of the iPhone while services providers and other handset OEM shareholders have not," Bachman wrote, but he also said that this "will not continue for perpetuity."

Likewise, analysts at Macquarie also predicted a change in the subsidy structure, but wrote in a research note that such changes wouldn't happen until next year. The analysts wrote that the carriers do not have many viable alternatives, and could risk losing out to their rivals unless they acted in concert to cut the subsidy. The analysts wrote that "iPhone subsidies are likely to fall in 2013 as lower-cost LTE Android and Windows phones (sub $350 wholesale ASP) and competitive LTE coverage from AT&T, Sprint and T-Mobile give all of the carriers more leverage against Apple."

Other analysts also do not see a subsidy cut coming in the near term, at least for the next 18 to 24 months. Analysts at CLSA think Apple's contracts with the carriers likely will prevent such cuts. "We believe these are multiyear agreements which tend to stipulate subsidy policies up front," CLSA analyst Avi Silver wrote. "For the major carriers, we believe these agreements have most favored nation clauses so any offering from Apple to one carrier would have to be offered to the other. During the length of these multiyear agreements, we believe U.S. carriers would need permission from Apple to alter subsidy levels."

For more:
- see this AllThingsD article
- see this MarketWatch article
- see this AP article
- see this ZDNet article

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