Apple's squeeze hits phone companies, competitors

By Peter Svensson

Associated Press

Published: Monday, April 23 2012 12:00 a.m. MDT

This April 5, 2012 photo shows the company logo at the Apple Store in London. Apple is set to report another record quarterly profit on Tuesday, April 24, 2012, continuing the relentless string of results that’s made it the world’s most valuable company.

dapd, Martin Oeser, Associated Press

NEW YORK — Apple is set to report another record quarterly profit on Tuesday, continuing the relentless string of results that's made it the world's most valuable company. Those profits don't come out of thin air: A range of businesses —from the company's wireless carrier friends to its PC-making foes— are seeing their profits melt away and flow to Apple's bottom line.

Apple's success is good for the U.S. economy, and some businesses, like software developers and memory-chip makers, have benefited from the disruption Apple is causing. But its enormous gains have resulted in others' pains, sometimes in unexpected places.

—AT&T Inc., for instance, took a chance on Apple's unproven phone in 2007, but the company might be regretting that decision. Since it became the first U.S. phone company to carry the iPhone, its stock is down 25 percent. Apple's is up 415 percent.

—Best Buy has sold Apple products off and on since the late 1990s, but analysts now see Apple as a major threat to the U.S.'s only remaining national big-box electronics chain.

—Worst off, of course, are rival phone makers. Apple has just 8 percent of the global phone market, but makes about 80 percent of the industry's operating profits.

Wall Street analysts expect Apple Inc. to post a profit of $9.2 billion for the January to March quarter when it reports on Tuesday. That's roughly in line with the profit expected from the world's largest oil company, Exxon Mobil Corp.

The majority of the profit will come from iPhone sales, especially now that three of the four national U.S. wireless carriers —AT&T, Sprint, and Verizon— sell the phone.

But, for a phone company, selling an iPhone is a bit of a gamble. The company pays Apple an average of $659 for iPhones and then sells them to consumers for between $50 and $200.

The phone companies count on making their money back, and more, in monthly service fees over the life of a two-year contract. Each iPhone comes with a data plan that adds at least $30 to a consumer's monthly bill. At AT&T, the average iPhone user pays more than $100 per month.

It turns out, however, that some of the added income wireless carriers get from data plans is just compensating for a drop in what they're able to charge for calling minutes. The money is also eaten up by the cost of network upgrades to support all the data traffic — the emails, photos and YouTube videos iPhone users consume.

"The primary beneficiary of the growth in wireless data has been one company — Apple," says William Power, an analyst with R.W. Baird & Co.

Despite the smartphone boom created by Apple's iPhone, "free cash flow," or the cash left over every quarter after expenses and capital spending, hasn't grown at the major U.S. wireless companies since 2007, according to Power's calculations.

In the same period, Apple's free cash flow has grown more than sixfold, to over $40 billion last year.

There are signs that U.S. phone companies are starting to take countermeasures. Apple's stock has fallen 11 percent from its all-time high, in part because investors think the phone companies might start demanding lower prices from Apple or making it harder for consumers to buy iPhones at heavily discounted prices.

Already, the phone companies have tightened their phone upgrade policies, meaning existing subscribers have to wait longer before they're eligible for a new $200 iPhone, and raised or introduced phone upgrade fees, which now range from $18 to $36. They promote cheaper phones running Google Inc.'s Android software and more recently, Windows phones.

However, the phone companies may have limited leverage to change the economics of the iPhone.