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iPhone 5 Side Effect: Profit Margin Pressure

Fri, 09/14/2012 - 7:58am
Maisie Ramsay

Fitch Ratings is reminding investors that the new version of Apple's iPhone won't be all upside for AT&T, Verizon Wireless and Sprint.

The ratings agency released a report yesterday pointing out that the last time the three operators rolled out an iPhone refresh, profit margins slipped by as much as 15 percentage points.

AT&T fared the worst between the third and fourth quarters of last year, when the iPhone 4S launch contributed to a 15.2 percentage point decline in profits. AT&T's margins slipped to 24.7 percent by the end of last year as customers flocked to the heavily subsidized iPhone 4S. 

During the same period last year, Verizon took a 5-percentage-point hit and Sprint saw its margins dip about 12 percentage points.

This time around, Fitch said AT&T and Verizon's healthy margins "puts both companies in good position to weather some near-term pressure." Both companies posted record highs for wireless profits last quarter.

However, Fitch warned that Sprint was less well-prepared to weather the cost of iPhone 5 subsidies. Sprint's profitability lags behind AT&T and Verizon, and its adjusted OIBDA margins were less than 18 percent during the second quarter. During the last iPhone refresh in 2011, its profit margins dropped to a meager 8.4 percent. 

Sprint's all-inclusive data plans could also put it at a disadvantage, Fitch said. While AT&T and Verizon Wireless will be able to generate additional revenue from iPhone users' increased data usage, Sprint's unlimited plans mean it won't benefit from the same effect. 

"Sprint faces greater challenges here, as it continues to offer unlimited data packages," Fitch said.

Sprint is paying Apple $15 billion to carry the iPhone under a five-year contract forged last fall, a massive bet for the heavily indebted company.

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