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Apple 's iPhone Subsidy 'iPain' May Be Over for Verizon, AT&T

Tickers in this article: AAPL GOOG MSFT RIM T VZ

"With Verizon now feeling the impact of iPain, and smartphone penetration reaching 58%, our concern shifts to what the company can do to mitigate the margin hit during future iPhone refreshes," Mike McCormack, a telecoms analyst at Nomura wrote in a note to clients.

On Tuesday, Cannacord Genuity analyst Greg Miller saw the prospect of falling iPhone subsidy costs and expanding wireless margins as a reason to upgrade Verizon's shares to 'buy' from 'hold' for the first time in over three years.

"We expect the impact to be temporary and device subsidies to be a source of margin expansion on a full year basis... This is primarily driven by less aggressive device promotions, longer upgrade cycle and the potential of lower priced smartphones, as Verizon increasingly focuses more on profitability than on mere subscriber growth," wrote Miller.

Product releases such as Research In Motion's rollout of BlackBerry 10 may be another opportunity for carriers to gain ground in the subsidy battle.

"The introduction of the new Blackberry may possibly drive subsidies down, thereby helping margins," writes Gimmie Credit bond analyst Dave Novosel, in a Jan. 23 note to clients.

That's where Apple's growth concerns begin.

On Tuesday, UBS analyst Steven Milunovich cut his earnings estimates for Apple on an expectation that the company will see a drop in the average selling price of its handsets as customers flock to the cheap iPhone offerings.

"We have moderated our iPhone price estimates because the survey finds that demand for storage has declined from about 30GB with the 4S to 20GB for the iPhone 5 with fewer customers opting for the 64GB model... Demand for older models has increased from 33% in the 4S cycle to 50% so far for the 5," wrote Milunovich, in a note to clients.

Such expectations might indicate a commoditization of Apple's iPhone products in the eyes of consumers and warrant a subsidy change in the New Year. That's especially the case given forecasts of Apple's falling market share relative to Google's Android ecosystem.

"Given the strong showing from Samsung, under most scenarios for iPhone shipments in the December and March quarters, Apple will lose smartphone unit share y/y, raising concern about the on-going dominance of iPhone," wrote Citigroup analysts in a preview of Apple's earnings.

"Based on our understanding of the iPhone5S (same form factor), we do not view the forthcoming launch (scheduled for the second quarter of 2012 ) as a catalyst for market share regain," the analysts add.

If buyers of subsidized smartphones are increasingly turning to low-cost iPhone options or cheaper non-Apple products, the fourth quarter of 2012 might indicate the peak of handset subsidies paid by carriers.