Here's Why Apple Doesn't Have to Worry About a Subsidy Problem

Verizon's strong Q1 earnings were a lot about the iPhone, proving Apple has nothing to worry about in terms of its wireless partners' subsidy of their mega-selling smartphones.

Verizon's strong Q1 earnings were a lot about the iPhone, proving Apple has nothing to worry about in terms of its wireless partners' subsidy of their mega-selling smartphones. The possibility of a subsidy crisis came to light last week, when the very-dominant Cupertino company had a bit of a stock dip that some attributed to wireless carriers threatening to trim the iPhone subsidies they now offer. In an attempt to lure customers to buy what would be a very expensive device, wireless carriers take a bit of the cost burden, making the phone less expensive and more attractive to consumers. Verizon, Sprint and AT&T have indicated, however, they are sick of losing money on each sale. Verizon just before the Apple stock scare, said it would begin charging customers $30 for iPhone upgrades, suggesting it might take other (harsher?) steps. But, at least from this quarter's earning report, Verizon can't really afford to lose its iPhone business.

The wireless carrier's strong first quarter was based on its a growing smartphone business, with revenue up due to "mobile service" growth. And though wireless customer growth slowed, half of all smartphone sales were iSales, with the company announcing 3.2 million iPhones sold out of its total 6.3 million smartphones. Verizon beat Wall Street's expectation, seeing a 17 percent increase in net-revenue. Basically, Verizon did well and a big part of that is because of the iPhone. Though Verizon loses about $400 with each sale, it makes up for it in data, texting and voice charges. And, as the earnings report shows, data plans are driving Verizon's business. Data revenues were up from $1.1 billion from over a year ago to $6.6 billion this quarter. Even as it loses money on the actual device overall, it's still winning.

But of course, it could always win more. If it didn't have to pay that $400 check and got the data fees, its margins would look even better. The wireless carrier has a precarious relationship with the best-selling phone, however. If Verizon acts alone, customers will get their iPhones elsewhere. And, there's also probably a too-expensive point, where Verizon, if it doesn't pay the subsidy, loses the sale altogether. No sale, no data. (Apple loses in that scenario, too.)

It's not clear that the subsidy talk had anything to do with the slip. It could have been a bubble or investor anxiety related to the earnings report. But, it's worth noting, since the dip, Apple's stock has recovered from its $580 low back to above the $600 mark.