Apple’s newest iPhone is proving to be a mixed blessing for wireless carriers and their Wall Street investors as company margins suffer from the subsidies paid to woo customers with discounted phones.

The biggest winner remains Apple, which charges between $649-849 for an iPhone 5 that IHSiSuppli estimates costs between $207-238 to manufacture, depending on the amount of memory included. Regardless of how much you pay for your next iPhone with a 2-year contract, Apple gets a much larger wholesale price, upfront.

Barclays analyst James Ratcliffe estimates AT&T, Verizon Wireless, and Sprint are providing nearly $400 in advance subsidies to reduce the contract price of the iPhone to between $199 and $399. That subsidy is 60 percent higher than comparable Android smartphones.

“We always say an Apple a day keeps the profits away,” Neil Montefiore, chief executive of Singapore wireless carrier Starhub said during an August earnings conference call.

Wireless carriers have to report the subsidy on balance sheets as a drop in earnings before interest, tax, depreciation and amortization (called EBIDTA on Wall Street). AT&T and Verizon typically don’t see profits from Android smartphone customers until 5-6 months after selling them a new phone. Apple iPhone customers are unprofitable for up to nine months.

According to Reuters, profit margins will fall for America’s two largest cell phone companies because of the newest iPhone.

AT&T’s margin is expected to fall from 45 percent in the second quarter to 40.8 percent in the third quarter and 35.7 percent in the fourth quarter. Verizon’s margin is expected to fall from 49 percent in the second quarter to 47.4 percent in the third quarter and 43.6 percent in the fourth quarter.

Sprint CEO Dan Hesse

Under pressure from investors, wireless carriers are trying harder than ever to reduce the financial hit from the endless two-year upgrade cycle most North Americans have gotten used to over more than a decade.

For most, changing data pricing has been the key to earlier profits. Both AT&T and Verizon Wireless have eliminated unlimited data plans for new customers, and Verizon has taken away subsidies for customers holding onto a grandfathered unlimited plan. As contracts expire, customers seeking upgrades must either purchase their next phone at the unsubsidized price or give up their unlimited plan for good.

Sprint continues to bank on its unlimited data offer bundled with Apple’s iPhone 5 as an important marketing tool to attract new customers. It has worked for them, but the company may eventually capitalize on that growth with increased prices, but not before Sprint completes an ambitious upgrade to a 4G LTE nationwide network.

“We have a competitive disadvantage in terms of LTE footprint,” CEO Dan Hesse told investors. “You don’t increase your price when you have a network footprint disadvantage. You want to wait and think of that until you get to that point.”

The foundation for future profits come from data usage.

Verizon’s chief financial officer Fran Shammo believes Verizon Wireless’ foundation for higher profits will come from their new family shared data plans.

“When you think about revenue growth into the future, the shared revenue plan and what I’ll call revenue per account if you will, is really the critical piece because there are two functions,” Shammo told investors last week. “One is get people to share so that data becomes the most significant piece of the plan and the more data they consume the more they will have to buy up in bundles.”

“And the second one is make it easier for customers to attach more devices. So when you think about that future of the car, the home, medical devices, and anything else that you want to attach to that wireless network, […] I get incremental dollars for each device that’s attached and that is really what drives the future revenue growth.”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/CBS Sprint CEO talks iPhone 5 and unlimited data strategy 9-20-12.flv[/flv]

Sprint CEO Dan Hesse last week appeared on CBS’ “This Morning” to discuss the arrival of Apple’s newest iPhone and the company’s unlimited wireless data plan.  (4 minutes)

A New Jersey man is facing down Verizon Communications after the company sent him a $2,345 bill for the company’s equipment lost in a devastating fire.

Jarrett Seltzer has been a Verizon FiOS customer for six years. A February fire destroyed virtually all of his property, including four Verizon cable boxes and a router installed six years ago. After notifying Verizon about the fire, Seltzer says Verizon continued to charge him for two additional weeks of service and then sent him a final bill for $2,345 to cover the lost equipment.

Seltzer called Verizon to complain about the bill and says he was transferred not less than 14 times during the call, which lasted about an hour and a half. At the end of the call, nothing was resolved.

“[Verizon] should be ashamed,” Seltzer said in a YouTube video describing his debacle.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Verizon FiOS billed me 2,345 for my burned cable boxes 9-21-12.flv[/flv]

Jarrett Seltzer says a February fire left him with nothing… except a $2,345 bill from Verizon Communications for equipment that was destroyed in the fire.  (2 minutes)

Seltzer says he has spent more than $18,000 as a Verizon FiOS customer over the last six years, and is astounded the company is aggressively trying to recoup damages for six year-old equipment. He is now at the point where he would not accept a credit from Verizon even if offered.

“I’d rather pay $2,345 for [equipment] I lost in a fire, along with everything else I’ve ever owned, than not make people aware of this,” Seltzer said.

Stop the Cap! regularly covers stories about customers facing enormous bills for lost or damaged provider equipment. While most companies will forego billing customers fees in high profile cases, and Comcast claims it will not charge customers for lost equipment if they don’t have insurance, many other companies are less understanding. One cable company asked a customer to search their tornado-devastated neighborhood to unearth lost equipment. Others demand advance payment while the insurance companies sort out claims in progress.

Renters are traditionally the most likely to face lost equipment charges because many mistakenly believe a landlord’s own insurance policy will cover their losses. That  impression can leave customers with nothing after a fire. But even with a personal renter’s insurance policy, some insurance companies still refuse to cover lost cable equipment or only offer to pay the depreciated, actual value of equipment, not the full retail price most companies demand. That may be the case with Geico — Seltzer’s next target.

[flv]http://www.phillipdampier.com/video/KDKA Pittsburgh Arson Victim Billed For Cable Equipment Lost In Fire 5-18-12.mp4[/flv]

KDKA in Pittsburgh got Comcast on the record — it will not bill people for lost or damaged equipment if they lack renter’s insurance — after this victim of an arson fire reported the company billed her more than $600 for lost cable equipment.  (2 minutes)

Despite industry propaganda touting an “unlimited broadband future” (possibilities, that is, not an end to usage caps) and good sounding headlines about robust competition in the broadband market, the reality on the ground isn’t as rosy.

Americans looking for a better deal for broadband are largely stuck negotiating with the local cable company or putting up with less speed from the phone company to get a cheaper rate.

That is hardly the “success story” being pushed by the Mother of All Broadband Astroturf Front Groups, Broadband for America. BfA, backed by money from some of America’s largest telecom companies calls today’s marketplace “dynamic” and “rapidly changing.” For them, competition is not the problem, the way we define competition is.

Tell that to San Jose Mercury News columnist Troy Wolverton, whose dynamic and rapidly changing Comcast cable bill has now reached $144 a month, and threatens to go higher still when his two-year contract expires.

Wolverton is a case study of what an average American consumer goes through shopping around for broadband service. Despite assertions of a vibrant, competitive Internet access paradise from groups like Broadband for America, Wolverton found very little real competition on the menu, despite being in the high tech heart of Silicon Valley.

Valley residents can typically choose between AT&T and Comcast, if they have any choice at all. Neither company offers a great deal for consumers.

Comcast offers faster speeds at considerably higher prices that can be reduced somewhat by signing up for a costly triple-play service. AT&T’s prices are lower, but its service is slower and is based on a technology that in my experience is less reliable.

So it goes for millions of Americans who face the same dilemma: take a higher-priced package from the cable company or settle for less from the phone company. With the exception of Verizon FiOS, most large telephone companies still rely on basic DSL service to deliver broadband. AT&T’s U-verse and CenturyLink’s Prism are both fiber to the neighborhood services that deliver somewhat faster speeds than traditional DSL, but also have to share bandwidth with television and traditional phone service, leaving them topped out at around 25Mbps.

Wolverton could not believe his only choices were Comcast and AT&T, so he visited the California Broadband Availability Map, one of the state projects earnestly trying to identify the available choices consumers have for broadband access. Despite California’s vast size, it quickly became apparent that even companies like AT&T and Comcast largely don’t deliver broadband outside of cities and suburbs. Several smaller, lesser-known providers emerged from the map that were open to Wolverton, which he explored with less-than-satisfying results:

In addition to Comcast and AT&T, it listed Etheric Networks, which offers a wireless Internet service directed at home users that’s based on Wi-Fi technology, and MegaPath, which offers Internet access through a variety of wired technologies, including DSL.

After further research I found that neither of those companies was a legitimate option. MegaPath can’t deliver residential service to my house that’s faster than 1.5 megabits per second. Etheric, which focuses on business customers, offers a service level with speeds of up to 22 megabits per second, but it costs a cool $400 a month.

Other non-options for Wolverton included the highly-rated Sonic.net, which in his neighborhood is entirely dependent on AT&T’s landlines for its DSL service. That was a no-go, after Wolverton discovered he would be stuck with 3-6Mbps service. Clearwire also offers service in greater San Jose, but not at his home in Willow Glen.

That left him back with AT&T and Comcast.

But that is not really a problem in the eyes of industry defenders like Jeffrey Eisenach, managing director and principal at Navigant Economics and an adjunct professor at George Mason University Law School. Navigant is a “research group” that counts AT&T as one of its most important clients. The firm provides economic and financial analysis of legal and business issues cover for clients trying to sell their agenda. Navigant’s “experts have provided testimony in proceedings before District Courts, the Department of Justice, the Federal Trade Commission, the Federal Communications Commission, the Federal Energy Regulatory Commission, and numerous state Public Utilities Commissions.”

Eisenach goes all out for the broadband industry in his paper, “Theories of Broadband Competition,” which throws in everything but the kitchen sink to defend the status quo:

• The cost of broadband service is declining;
• The duopoly of cable and phone companies are still competing for customers and introducing new services;
• Competition can take the form of provider innovation (ie. providers compete by offering a better services, not lower prices);
• Wireless competition is accelerating, citing LightSquared and Clearwire as two conclusive examples of competition at work;
• The cost of service on a per-megabit basis has declined.
• Competition in today’s broadband market delivers ancillary benefits not immediately evident when only considering the customer’s point of view;

Eisenach’s pricing proof stopped in 2009, just as cable providers like Time Warner Cable began raising broadband prices. TWC’s Landel Hobbs to investors: “We have the ability to increase pricing around high-speed data.” (February, 2010)

Eisenach has appeared at various industry-sponsored evidence touting his views of broadband economics and competition that later turns up as headline news on Broadband for America’s website. But just as Wolverton’s initial optimism finding other choices for broadband faded with reality, so do Eisenach’s conclusions:

1. Eisenach’s evidence of broadband price declines stops in 2009, coincidentally just prior to the recent phenomena of cable broadband rate increases, which have accelerated in the past three years;
2. Competition still exists in urban and suburban markets, as long as phone companies attempt to stem the tide of landline losses, but it’s largely absent in rural markets and in decline in others where companies “reset” prices to match their cable competition. AT&T’s U-verse and Verizon’s FiOS both effectively ended their expansion, leaving large swaths of the country with “good enough for you” service. Cable operators have even teamed up with Verizon Wireless to cross-market their products — hardly evidence of a robustly competitive marketplace;
3. Innovation can take the form of services customers don’t actually want but are compelled to take because of bundled pricing or, worse, the decline in a-la-carte add-ons in favor of “one price for everything” models. Verizon Wireless set the stage for providers of all kinds to consider mandatory bundling for any product or service that can no longer deliver a suitable return on its own. For customers already taking every possible service or fastest speed, this pricing  may deliver lower prices at the outset, but for budget-focused consumers, compulsory packages or high prices on a-la-carte services assures them of a higher bill;
4. Eisenach’s examples of competition are a real mess. LightSquared is bankrupt and Clearwire has shown it cannot deliver an equivalent broadband experience for customers and throttles the speeds of those perceived to be using the service too much. Other wireless providers typically limit customer usage or cannot deliver speeds comparable to wired broadband;
5. While the cost per megabit may have declined in the past, cable providers are still raising prices, and as Google and community-owned providers have illustrated, delivering fast speeds should not cost customers nearly as much as providers continue to charge, with no incentive to cut prices in the absence of equally fast, competitive networks;
6. While broadband may open the door for additional economic benefits not immediately apparent, competitive broadband would further drive innovation and reduce pricing, delivering an even bigger bang for the buck.

Wolverton recognized taking a promotional offer from AT&T will temporarily deliver savings over what Comcast charges, but he would have to set his expectations lower if he switched:

I’m reluctant to switch to AT&T. [U-verse] Max Plus is the fastest level of service it offers at our house, but with a top speed of 18 megabits a second, it’s significantly slower than Comcast’s Blast. Speed matters to us, because my wife and I often share our Internet connection, and we frequently use it to transfer large files such as apps, videos, photos or songs to or from the Net.

[…] What’s more, as the FCC outlined in another recent report, Comcast does a better job of delivering the speeds it advertises than does AT&T.

What’s worse in my book is that AT&T’s U-verse’s Internet service is a version of DSL. It’s faster than regular DSL, because the copper wires in your house and neighborhood are connected to nearby high-speed fiber-optic cables. Even with that speed boost, though, I’m hesitant to go back to any kind of DSL service, because my wife and I suffered through years of unreliable DSL service from AT&T predecessor PacBell and then EarthLink, which piggybacked on AT&T’s lines.

Wolverton also objected to Comcast’s bundled pricing scheme, which delivers the best value to customers who sign up for broadband, television and phone service. Wolverton does not need a landline from AT&T or Comcast, and would like to drop the service. He’s not especially impressed with Comcast’s TV lineup (or pricing) either. But he noted if he switched to broadband-only service, Comcast would effectively penalize him with a broadband-only rate of $72 a month, exactly half the current cost of Comcast’s triple-play package.

In a later blog post, Wolverton confessed he liked Comcast’s broadband service and speeds, and with the carefully-crafted pricing the cable and phone companies have developed, he expected to remain a Comcast customer given his choices and pricing options, which are simply not enough.

AT&T customers upgrading to Apple’s newest iPhone will be able to keep their grandfathered unlimited data plan and purchase the phone at discounted prices starting at $199, with a new two-year contract.

AT&T’s definition of “unlimited” has, for at least a year, actually meant up to 3GB of usage before throttling your 3G speeds to something comparable to dial-up Internet. But with the iPhone 5 ready to run on AT&T’s higher capacity 4G network, the company is increasing the limit to 5GB per month.

AT&T has been working hard to hold onto its significant base of iPhone owners, who have endured dropped calls and slow data in many cities for the last several years.

Customers planning to leave AT&T will find a considerably less-friendly attitude at Verizon Wireless, where new customers are compelled to sign up for a Share Everything plan that starts with just 1GB of usage per month.

Sprint is retaining its unlimited smartphone data plan with no hidden limits or speed throttles, but Sprint’s overburdened 3G network is not known for fast and reliable speed, and the company’s aging 4G Clearwire WiMAX network cannot perform as well as Sprint’s forthcoming LTE counterpart, which has only appeared in a handful of cities so far.

The iPhone 5 will be the first Apple phone ready to take advantage of 4G LTE speeds, which could give those new networks a real workout as millions of new iPhone owners pile on.

Verizon is pulling back on its traditional landline service and FiOS expansion to continue focusing on its more-profitable wireless service.

Verizon Communications’ landline customers will endure continued cost cutting as the company focuses on its increasingly profitable wireless division, now set to bring in even more profits with Verizon Wireless’ transition to new, often higher-priced service plans.

Verizon executive vice-president and chief financial officer Fran Shammo yesterday told investors attending Bank of America-Merrill Lynch Media’s Communications & Entertainment Conference that the company is pleased with Verizon Wireless’ successful transition to Share Everything, which includes a shared data plan for multiple wireless devices.

Shammo characterized the true nature of Share Everything as a data plan that happens to include unlimited calling and messaging.

“It really comes down to data consumption and that is what drives revenue,” Shammo told investors. “And really the reason we did this was because we saw what happened in Asia with some of the text messaging and the dilution and voice migration.  So you are protecting that revenue stream going forward and we think that is beneficial to the consumer and the company.”

Shammo sees increased profits in Verizon’s future as customers transitioning away from unlimited data plans eventually bump up and over their new plan limits. But the revenue gains actually begin the moment customers sign up, as those bringing various wireless devices to a shared data plan are immediately told to upgrade for a larger data allowance at an additional cost.

“We are telling them that they really need 2GB per device,” Shammo said. “So if they want to bring five devices, they really should be buying the 10GB ($60/month) plan. What we are finding is customers are very receptive to that formula because they can get their head around the 2 gigabytes. They understand what their usage is. So part of it is that they are actually buying higher up packages than we’ve anticipated.”

Verizon also has a plan to deal with potential bill shock from customers using their wireless devices for high bandwidth applications. The company is receptive to letting content producers pay Verizon to cover customer usage charges.

Share Everything = a data plan that happens to include unlimited calling and messaging

“So when you look at that, revenue per account may not go up, but service revenue will because you are just getting it from someone else,” Shammo said. “So the LTE network allows the differentiation, and the way I like to classify it as you can have an 800 service over here, which is ‘free data’ because somebody else is paying for that and then you have your consumption data over here.”

Shammo believes customers who gave up their unlimited data plan believing Verizon’s basic data allowance will suffice for years to come will be surprised at how fast they will hit their limits as wireless data becomes more important.

“I think we are going to see this accretion faster than people think,” Shammo said. “If you look at our SpectrumCo [cable operators Cox, Comcast, Bright House Networks, and Time Warner Cable] deal, [CEO Lowell McAdam] and the team did an outstanding job convincing the Department of Justice about the innovation that can happen here and maybe being the first in the world to really integrate wireless with inside the home and content outside the home. And if you think about how that content can be streamed outside the home within cars, you really say this is unlimited as to where this can go. So I think the innovation is going to come very, very quickly here.”

With the spectrum deal with cable operators in place, Shammo said Verizon will not be in the market for any large spectrum acquisitions in the near future, and even plans to sell off some excess spectrum it does not currently need, so long as the company gets paid what it believes the spectrum is worth.

Verizon’s concern for keeping large amounts of cash on hand is evident as it continues to reduce investments in traditional landline service and FiOS. In fact, Verizon said it would continue increasing prices for its FiOS fiber network to more closely align with the higher prices cable companies are charging.

“We have really concentrated this year on getting our price points equivalent to where the rest of the market was,” Shammo said. “We were actually underpriced with a superior product to cable. So the concerted effort was we needed to do some price-ups and we are doing that over — we started in the first quarter. We did it in the second; we are doing it in the third. You saw some of that benefit come through in the second quarter where we delivered a 2.5% mass-market revenue increase, which was I think the best in years and I see that doubling by year-end. So I think that, coming out of this year, we will be on a very good path for a mass-market revenue increase.”

Two service calls in six months may get your traditional landline canceled and moved to Verizon FiOS phone service, which requires 10 digit dialing for every number.

But those rate increases will not deliver improved service. If fact, Shammo said Verizon will continue reducing costs and investments in its network. Much of its investment in the landline business has been to support Verizon Wireless’ growth through its IP backbone and fiber-to-cell-tower projects. Shammo predicts capital investments will continue to be flat to down.

One example where the cost-cutting is apparent is how Verizon deals with service calls for troubled phone lines.

Verizon landline customers in FiOS areas who report chronic service problems may find themselves disconnected and switched to FiOS Voice over IP phone service instead, because Verizon has quietly set new in-house rules about the number of permitted service calls for each customer.

“If we have a copper customer who is what we classify as a chronic (two truck rolls in a period of six months for that copper line), I am losing money on that copper customer,” Shammo said. “So if I can take that chronic customer and move them to FiOS, I deplete the amount of operational expense to keep that customer on and now I have moved them over to the FiOS network where they get the benefit of FiOS digital voice, which is clearer.”

Once a customer gets switched to FiOS, Verizon’s marketing machine swings into action.

“I now can put their DSL service onto FiOS Internet where they now realize the speeds of FiOS and what we are seeing preliminarily is even if we take a voice and DSL customer and move them, they are starting to buy up in bundles because they are starting to see the benefit of the higher speeds,” Shammo said. “Then we open up the sales routine to go after them, now for the FiOS TV product.”

Unlimited data holdouts can leave

Shammo added Verizon is becoming more concerned than ever about long term investments that leave the company waiting years for a return.

“Lowell and I have a very concerted effort to really make sure that the investments we make are returning their invested capital in a very short period of time,” said Shammo.

That spells trouble for landline service upgrades and future FiOS expansion, which both require the company to take a long term view recouping those investments. But even Verizon’s wireless business’ capital expenses are down — by $1.3 billion through the first half of this year.

Verizon Wireless has also picked up nearly $5 billion in cost savings through restructuring, including lucrative revenue earned from new activation and upgrade fees and also tightening up on subsidized wireless phone upgrades.

For customers holding onto unlimited data plans, intending to get their money’s worth from them, Shammo has a message:

“Quite honestly, they could leave my network because you are not making much money on those.”