Verizon paid dearly to put iPhones in the hands of subscribers in the latest quarter, holding back its profits in the hope that its customers will rack up higher monthly bills and stay loyal.
The quarter saw the launch of the iPhone 4S, the second model to be sold by Verizon, and it was clear that many had been waiting for it. Verizon on Tuesday said it sold 4.3 million of them, and 7.7 million smartphones total.
But by the upside-down logic of the wireless industry, higher sales mean lower profits for the quarter. Verizon Wireless subsidizes each smartphone by hundreds of dollars, figuring that it will make the money back in service fees over a two-year contract. That means the wireless division, though still highly profitable, posted a rare drop in operating income for the fourth quarter.
An iPhone that Verizon buys from Apple for around $600 is sold in stores for $200. The question is whether phone companies ever really make that money back.
Sanford Bernstein analyst Craig Moffett argues that the example of AT&T, which has sold iPhones since 2007, indicates that the expected boost to profits never really materializes, because the phone companies have to keep subsidizing each new iPhone release.
"The earnings pop will always be a year away," Moffett wrote Tuesday.
In the results of Verizon Communications Inc., the phone company that owns 55 percent of Verizon Wireless, the effect of the iPhone sales was masked by large charge for adjusting the value of its pension plans.
The New York-based company reported that it lost $2.02 billion, or 71 cents per share, in the last three months of 2011. That compares with net income of $2.64 billion, or 93 cents per share, a year ago.
Verizon had warned that the big pension charge was coming.
Excluding the pension effect and another one-time item, Verizon earned 52 cents per share. That was a penny shy of the average forecast of analysts polled by FactSet. Comparable earnings last year were 54 cents per share.
Verizon had warned that hefty smartphone sales would hold back earnings, but analysts had expected a slightly smaller drop. Verizon shares fell 61 cents, or 1.6 percent, to close at $37.79 Tuesday. On Jan. 3, they hit a four-year high of $40.48.
Revenue rose 7.7 percent to $28.4 billion from $26.4 billion a year ago. The latest figure was in line with analysts' expectations.
Wireless accounted for all of the revenue increase, as Verizon's wireline division saw a small decrease. The "old" phone company essentially breaks even, despite the popularity of its cable-like FiOS TV and Internet service.
Usually, Verizon's overall revenue increase is driven higher monthly wireless service revenues, as it gains customers. But this quarter, the largest contributor to the rise in revenue was phone sales, which doubled from last year to $2.2 billion.
Verizon Wireless added 1.2 million new subscribers on contract-based plans, which are the most lucrative. It was the second-best result in the last two years, further solidifying the company's position as the industry leader, with 87.4 million phones and other devices on contract-based plans, and 108.7 million total.
Vodafone Group PLC of Britain owns the remaining 45 percent of Verizon Wireless, and lays claim to a corresponding share of the profits.