Verizon Communication, the second-largest U.S. phone company, reported a fourth-quarter loss after booking a pension charge and having higher subsidy costs for rising iPhone sales.
Sprint Nextel third-largest U.S. mobile network operator by subscriber numbers, reported a substantially larger fourth-quarter net loss than the same quarter a year ago, mainly reflecting the higher costs of selling Apple’s heavily subsidised iPhone 4S.
Basically, first Verizon and then Sprint got the rights to sell iPhones and began offering them with the customary subsidies that you get in exchange for signing a two-year contract. But since the contract pays out in dribs and drabs over its life while the phone subsidy needs to be paid right away, the phone itself operates as a loss-leader for the service. Consequently, if you gain a ton of new iPhone customers you end up booking an accounting loss. Of course unless Verizon and Sprint are catastrophically mispricing their iPhone service plans that’ll be a very misleading way of thinking about the situation. But by the same token, thinking of the subsidized prices of smartphones as the real price to consumers is equally misleading. I’m eagerly awaiting the day when we move past the subsidy model and people get a clearer sense of what they’re really paying for.
