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Apple's squeeze hits phone companies, competitors

By Peter Svensson

Associated Press

Published: Monday, April 23 2012 3:50 p.m. MDT

AT&T, Sprint and Verizon are in a hotly competitive race. Each one is afraid to tighten policies or raise prices too much, lest subscribers jump to a competitor.

When Verizon started selling the iPhone last year, AT&T's CEO vowed to push Android phones because they're not as expensive to subsidize. But the company ended up selling more iPhones than ever.

Sprint Nextel Corp., the last of the big carriers to get the iPhone, is in a precarious financial position after many years of losses. Sanford Bernstein analyst Craig Moffett thinks there's a risk that the cost of selling the iPhone could push Sprint into bankruptcy.

Another partner struggling to deal with Apple's success is Best Buy Inc., the largest consumer electronics retailer in the U.S.

"While Best Buy has enjoyed strong sales with Apple products, Apple has benefited more," Daniel Binder, an analyst with Jefferies & Co., wrote last month.

Apple's own stores compete with Best Buy, and as Apple products win out over others, consumers become more likely to shop at Apple stores. Binder downgraded Best Buy a year and a half ago, saying the iPad would cut into PC sales. That trend has been even stronger than he expected, he says.

Best Buy stores sell less than $1,000 in merchandise per square foot per year, according to research firm RetailSales. Apple stores sell more than six times as much, a record for the U.S. retail sector.

If Apple does release a TV set this year, as has been rumored, that would be even worse news for Best Buy, Binder says.

Although Apple is only the world's third largest phone maker, behind Nokia and Samsung, it is pummeling rival phone makers, as well. Apple doesn't make inexpensive phones at all, which should leave plenty of room for other phone makers.

But that's somewhat of an illusion. Cheap phones have become commodity products, with fierce competition and low margins, so most phone makers are looking to smartphones for profits. But that's exactly where Apple dominates. As the world's largest buyer of chips, the company has a massive advantage in procuring components at the best prices, and consumers seem to favor the iPhone regardless of the features others use to jazz up their handsets.

High-end smartphones cost about $200 to make. Apple sells the iPhone for an average of $659. Other manufacturers sell competing phones for between $300 and $400.

Canaccord Genuity analyst Michael Walkely estimates that if you add up the operating profits made by the world's eight largest phone makers in the last three months of last year, you'll find that the iPhone accounts for 80 percent of the money.

Walkley believes Apple is set to take an even larger share of those earnings this year.

Most of the profits left over are going to Samsung Electronics Co., the Korean company that makes the popular Galaxy S line of smartphones. For now, Samsung looks like the one competitor that's able to thrive in an industry dominated by Apple.

Nokia Corp., the world's largest maker of phones, has taken the drastic step of ditching its whole smartphone family and betting instead on phones that run on Microsoft's new Windows software. Nokia shares have lost nearly 90 percent of their value since the 2007 debut of the iPhone. Its sales fell 23 percent, and it posted a large loss last year.

The consumer electronics industry is suffering at the hands of Apple, too. As consumers use iPhones and iPads to do things that once required camcorders, cameras and GPS devices, sales of these devices are shrinking. Smartphones and tablets are sucking up the consumer dollars, says Steve Bambridge, research director at U.K.-based GfK.

In the U.S., Apple's computers and other devices accounted for 19 percent of all the spending on consumer electronics in the holiday season, according to NPD Group. That's a tripling in two years.

The trend is particularly rough on the Japanese companies that once ruled consumer electronics.