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Verizon Deal With iPhone Won't Boost Earnings at First

Tuesday, 11 Jan 2011 | 10:59 AM ET
Apple iPhone
Manuel Balce Ceneta
Apple iPhone

The deal to bring the iPhone to Verizon is a big one. Verizon customers have been waiting for years, and the company should see a boost in the number of subscribers that it adds.

The consensus is that, in the end, this will be a positive for Verizon . But in the near term, most likely, it won't see a boost in terms of earnings. Just the opposite, in fact.

"In the early phases of their [iPhone, manufactured by Apple] deployment, most of the subsidies are going to dilute Verizon's earnings," said Chandan Sarkar from Auriga.

It's simple math. Although official figures are not released, it's believed that Verizon is paying an iPhone subsidy between $350-400 per device. Basically, Verizon pays Apple a certain amount for the phone and then sells it at a discount to the customer. The difference is the amount that Verizon—and its shareholders—have to absorb.

CES 2011 - Your Digital Life - A CNBC Special Report
CES 2011 - Your Digital Life - A CNBC Special Report

"The Street is modeling about $2.25 in earnings for 2011 for Verizon, Sarkar said. "We think that number is going to come down by about 15-20 cents once the impact of these iPhones are fully incorporated into Street models."

In terms of 2011 sales projections for the Verizon iPhone, the analyst community has a huge range right now. The low end is about 5 million units, while the highest is in the 13 million range. If the subsidy is approximately $400, the hit to Verizon could be over $5 billion.

Eventually, with income from long-term contracts and data plans, this will pay for itself, but in the near term, expect earnings estimates to come down for Verizon. For a stock that's been up more than 35 percent in the last six months, Verizon could be in for a breather.

"In the later phases of the deployment," Sarkar said, "say next year and beyond, it will start to become a positive slowly for Verizon."

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