Updated to reflect Gimmie Credit comments starting in 14th paragraph.
NEW YORK ( TheStreet) -- Heading into first quarter earnings, investors appear to be worried Apple (AAPL - Get Report) is losing its ability to sell premium priced iPhones amid competition from cheaper Google (GOOG)-Android powered devices and new product launches from Microsoft (MSFT - Get Report) and Research In Motion (RIMM).
Fundamentals are also in question as Apple faces its first potential quarterly profit drop in a decade and a sharp slowdown from the near 25% growth rate the world's largest tech giant posted at this time last year.
But the real story to Apple's earnings may hinge on a potential change to the company's relationship with wireless carriers Verizon (VZ - Get Report) and AT&T (T - Get Report) in 2013 and less with its battle against Google's Android ecosystem.The key for investors to consider is whether a long standing relationship between Apple and wireless carriers is about to turn from an earnings windfall for the iPhone maker to a growth drag starting in the New Year. Already, some expect fourth quarter earnings to be a turning point. As seen in Verizon's (VZ - Get Report) weaker than expected earnings - which were cut multiple times into the report - Apple's iPhone 5 launch and millions of subsidized quarterly handset sales by the carrier proved to be a significant profit and margin drain.
But some, notably Evercore Partners telecoms analyst Jonathan Schildkraut, expected earnings to be light and recommended buying Verizon's shares were they to fall on the weak report. After falling over 2% in pre-market trading on Tuesday, Verizon shares recovered and closed up on the day, validating Schildkraut's analysis. So what gives? Schildkraut and other analysts forecast a surge in fourth quarter subscriber additions and handset upgrades for Verizon and AT&T, which would hit margins because of subsidy costs. In the wake of the weak reports, those analysts also expect subscriber growth and rising revenue per user to again be at the forefront of investor focus, as it was through the first nine months of 2012. In an analyst call following Verizon's earnings - which showed over 2 million customer additions and revenue per account rising 6% to $146.80 a month - the company forecast its wireless margins could be as high as 50% in 2013, representing strong year-over-year growth. "
"With Verizon now feeling the impact of iPain, and smartphone penetration reaching 58%, our concern shifts to what the company can do to mitigate the margin hit during future iPhone refreshes," Mike McCormack, a telecoms analyst at Nomura wrote in a note to clients. On Tuesday, Cannacord Genuity analyst Greg Miller saw the prospect of falling iPhone subsidy costs and expanding wireless margins as a reason to upgrade Verizon's shares to 'buy' from 'hold' for the first time in over three years. "