Apple Dominates Wireless Carriers

Apr.24.12 | About: Apple Inc. (AAPL)

I have seldom seem a more diverse set of headlines about a quarterly earnings report than the latest on AT&T (NYSE:T).

New wireless subscribers down sharply, warns the AP. AT&T boosted by smartphone sales, writes the Financial Times. Fox Business notes that "postpaid churn declines" while Reuters' headline was "iPhone Sales Drop helps AT&T's 1Q Profit."

Strange days indeed.

Here is what is going on. As noted earlier with Sprint (NYSE:S), carriers pay Apple for phones before they get orders, and actually lose money initially because they're subsidizing the purchases. The hope is always that customers will stay through their contracts and the carriers will make this up on the back end.

This seems to be happening in the case of AT&T. Churn is down, continuing revenues up, so profits are slightly higher.

But this comes at a price. AT&T is losing iPhone share to rival Verizon (NYSE:VZ).

Investors can look at this in different ways. AT&T profit up, good. AT&T iPhone share down, bad. Or - and this is the way I look at it - iPhone dependence very, very bad.

Because an iPhone costs a lot of money, because carriers have to subsidize the purchase and buy the phones before the customer walks in, Apple (NASDAQ:AAPL) is making huge profits and the carriers are left holding the bag. As iPhone use increases, so does data usage, and this strains networks, thus forcing a boost in capital spending - which as we should all know by now has a negative return on investment.

The carriers' best hope is that Android phones and Windows phones, which cost less up-front but also deliver more high-priced data plans, will gain share against the iPhone as time goes by. (Android does have a bigger share of the market than iPhone right now, but that is stabilizing. Windows Phone is the big question market.) So if you go by an AT&T store expect to find a lot more of those phones in the window, and a lot fewer iPhones.

The lesson is clear. Apple is dominating the mobile space, at carrier expense. That's the the message investors should be taking away.

Disclosure: I am long AAPL.