Just over a month ago Apple unveiled its newest smartphone -- the iPhone 5 - in a blockbuster launch that set opening records for the company. Amid all the iPhone 5 hysteria, however, not everyone was cheering.
As launch numbers rolled in, investors and analysts following AT&T (T - Get Report) and Verizon began to wonder aloud whether the adoption of Apple's latest smartphone would wreck telecom sector profitability and disprove an emerging notion that, after spending billions to build national networks, both carriers' investment would pay off in steadily rising profits.
Verizon's stronger-than-expected earnings signal that, for now, doom and gloom scenarios on the interplay between iPhone 5 sales and wireless carrier profitability may not be borne out.
At issue is whether the carriers can use new smartphone launches to profitably steer users onto their networks. On one hand, carriers pay in the range of $500 a phone in subsidies to handset makers like Apple to lure in customers - or to meet the terms of upgrade schedules - in a relationship that can cost big money. Over the long term, carriers expect to make their money back on subsidized handsets by way of the monthly cost of wireless contracts, and in particular, the tiered pricing of smartphone data usage.Verizon's earnings, and, in particular, record wireless revenue and profit margins prove that iPhone 5-related fears are unproven. At least for now, the company's earnings momentum continues to build. As profit margins grow, Verizon also appears to be adding new iPhone and Google Android-addicted subscribers at a faster-than-expected clip, potentially disproving a theory peddled by analysts that waves of subscriber additions and phone upgrades could turn stable telecom earnings cyclical. The results indicate that the carrier can lure subscribers onto its network using flashy iPhone and Android devices without wrecking its profit margins. That contrasts sharply with some analyst expectations, forcing some to backtrack from projections that the iPhone 5 would take the air from a so-called telecom sector dividend bubble. In the wake of Verizon's earnings, Bernstein Research's Craig Moffett suspended his thesis that Verizon's earnings momentum would tip negative on the iPhone 5 launch. "The test we all knew about was wireless margins. Even solid growth (which brings commensurately high customer acquisition cost) and a new iPhone (available for a single week in Q3) couldn't derail the