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Here's the Real Reason Investors Should Be Worried About Apple's iPhone 5


In the daily speculation on everything Apple (NASDAQ:AAPL), investors may be missing what could be the biggest story to emerge from the iPhone 5 after its September 2012 release.

The release of Apple's newest iPhone and a lineup of tablet products will provide a key fourth-quarter test to the sustainability of profit margins for telecom giants Verizon (NYSE:VZ), AT&T (NYSE:T), and Sprint (NYSE:S).

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A recent Wall Street Journal report indicates that Apple may be cutting orders with suppliers who build the iPhone 5, potentially indicating less than anticipated demand for the company's newest smarthphone. The report, which cites anonymous sources, adds to a frenetic 2013 in the Apple rumor mill.

Previous media reports indicated Apple might start selling iPhones as low as $99 by year-end, however, Phil Schiller, Apple's head of marketing quickly nixed such speculation.

Apple, at its 11 price-to-trailing earnings multiple, seems to attract an ever growing number of bulls who see the cheap multiple attached to America's most profitable company as an obvious 2013 value -- and skeptics who call the company a value trap and foresee a commoditization of its premium-priced tech products.

In the interim, the more urgent iPhone 5 story may have little to do with Apple or its shares.

As telecom giants Verizon and AT&T prepare to report fourth-quarter earnings, analysts are bracing for the full impact of smartphone subsidies and, in particular, the earnings hit that might come from an entire quarters worth of subsidized iPhone 5 smartphone sales.

Already, carriers have indicated that Apple's newest smartphone will have an impact on earnings, even if trends like underlying subscriber and average revenue per user growth indicate a strong outlook for the industry's top players.

Earlier in January, Verizon CEO Lowell McAdam said that the company added 2.1 million wireless subscribers in the fourth quarter, "a truly impressive result," according to Craig Moffett of Bernstein Research. Still, the oftentimes bearish telecom analyst noted such subscriber growth may come at a cost, highlighting two January 8-K filings Verizon made with the Securities and Exchange Commission that indicate wireless service margins for the fourth quarter might fall on a year-over-year basis.

A decline in wireless margins as a result of subsidized new iPhone and Google (NASDAQ:GOOG)- Android operated handsets would cut against three successive quarters where Verizon's margins have improved, according to a Monday note by Moffett. It means investors in the likes of Verizon and AT&T might have to temper expectations what the sustainable level of wireless profitability is.

Such a scenario of fourth quarter weakness could either vindicate long-time skeptics of wireless profitability. A moderate earnings hit might give telecom investors little reason to believe the industry's economics aren't on a long-term uptrend headed into 2013.

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