IPhone May Cost Verizon $5 Billion in Subsidies in First Year

Verizon Wireless, set to get Apple Inc.’s iPhone Jan. 11 after four years of waiting, may spend $3 billion to $5 billion to subsidize customer purchases of the device in 2011 alone, based on the expected $400 per iPhone subsidy Verizon will absorb.

While the smartphone will help Verizon add more subscribers this year than rival AT&T Inc., currently the exclusive U.S. carrier for the iPhone, it will also crimp profits, said John Hodulik, an analyst at UBS AG.

Hodulik said Verizon may sell 13 million of the devices with an estimated $400 subsidy this year, which would add up to a total of $5.2 billion. Of course, some observers say Verizon Wireless will not sell nearly that many devices.

Verizon will sell only five million to seven million iPhones in 2011, argues Dan Hays, PRTM director. Still, a hit to earnings of $2 billion to $5 billion in a single year suggests significant competition in the mobile business. Executives in non-competitive industries do not willingly sacrifice $2 billion to $5 billion in earnings.

IPhone May Cost Verizon $5 Billion in Subsidies in First Year - BusinessWeek