iPhone:The good news and bad news for Verizon

Verizon iPhone 4The enthusiastic initial response Verizon Wireless customers have given the CDMA version of Apple’s iPhone 4 – Verizon had to halt pre-orders just 17 hours after they began – is a double-edged sword for the largest US mobile network operator. 

That is because the hefty subsidy Verizon pays Apple for the iPhone – estimated at about $400 per unit – could depress earnings at least in the short term, if Verizon Wireless sells more iPhones than expected. 

Analysts had been expecting Verizon Wireless to sell about 11m iPhones this year and, based on those figures, its joint venture parent, Verizon Communications, forecast that earnings this year would rise by between 5 per cent and 8 per cent and perhaps double that in 2012. 

Verizon isn’t disclosing exactly how many iPhones it had set aside for pre-order sales to existing customers, although Mike Abramsky, an analyst at RBC Capital Markets in Toronto,  estimates that Verizon probably sold less than 100,000 iPhones before shutting down pre-orders.

“The stock sell out on the first day of preorders affirms the strong pent-up demand for the Verizon iPhone and bodes well for initial sell-through,” he said.

But if Verizon Wireless blows through the analyst estimates and sells substantially more than  11m iPhones this year, it could be looking at much higher aggregate subsidy payments.

As Verizon’s senior executives are at pains to point out, it is very difficult to predict exactly what impact this would have on 2011 results. But despite the headlines, selling more iPhones isn’t necessarily good for the bottom line this year.