How Apple’s iPhone Actually Hurts AT&T, Verizon and Sprint

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Photo-Illustraion by TIME; Apple

Apple’s iPhone is the hottest mobile device around — so hot in fact that the major mobile service providers are willing to sacrifice their own profit margins just to carry it. The big three providers, AT&T, Verizon Wireless, and now Sprint, all pay hefty up-front prices to Apple for the privilege of stocking the iPhone, which they then turn around and sell at deep discounts to customers willing to sign two-year contracts. And the carriers have little choice: the name of the game in the mobile business is subscriber growth and none of the big providers wants to be cut out of the iPhone action.

The latest evidence of this dynamic came Wednesday when Sprint reported a $1.3 billion loss, due in part to its steep subsidization of the iPhone, which it only began selling last quarter.

CNNMoney has a good post describing the situation the mobile companies face, particularly the role of “EBITDA service margin,” a measure of profitability. As the data shows, when the carriers sell more iPhones, their profit margins decline:

Since Apple’s iPhone debuted on Verizon’s network in February 2011, Verizon’s “EBITDA service margin” — a closely watched metric that carriers use to measure their core profit as a percentage of their sales — has tumbled. Between 2009 and 2010, Verizon averaged EBITDA service margin of 46.4% per quarter. In the first quarter that the iPhone went on sale, that fell to 43.7%.

Last quarter, when Verizon sold a record 4.2 million iPhones, its margin plunged to 42.2%. Verizon had just one “good” stretch this year: The third quarter, when its margin bounced back up to a record 47.8%. That’s the same quarter in which iPhone sales stalled, as customers waited for Apple to unveil its heavily anticipated new model.

AT&T and Sprint suffered an even worse fate. AT&T posted a stunning 28.7% EBITDA service margin last quarter, compared with 37.6% a year earlier. One contributing factor: AT&T sold nearly twice as many iPhones as Verizon last quarter. After selling nearly 2 million iPhones last quarter, Sprint’s adjusted wireless margin fell to 9.5%, down from 16% a year ago. The company said Wednesday morning that its margin was significantly lower than it would have been without the iPhone subsidy.

This suggests that judging purely by the numbers, the iPhone may not be the greatest business proposition for the mobile service providers. “A logical conclusion is that the iPhone is not good for wireless carriers,” Nomura Securities analyst Mike McCormack told CNNMoney. “When we look at the direct and indirect economics that Apple has managed to extract from the carriers, the carrier-level value destruction is quite evident.”

Of course, when it comes to Apple products, pure logic is not the only thing that applies. And the carriers have come to the conclusion that however much it hurts to be able to sell iPhones, it’s worth the pain.