Second-guessing the subsidy

Now, neither Verizon nor AT&T wants to kill the smartphones that are laying these golden eggs. In the second quarter, Verizon activated 2.7 million iPhones (and 2.9 million Droids.) That's a lot of data service. And I'm sure that Verizon and AT&T will see even more data-service revenue from the iPhone 5 with its LTE features. And all the numbers from the wireless service companies indicate that iPhone customers are the most loyal. That counts for something when it costs between $300 and $400 to acquire a new customer.

But still, the huge subsidy to Apple has to rankle whenever the CEO at Verizon or AT&T looks at the company books. The average subsidy for an Android phone is in the range of $200 to $300. If AT&T or Verizon could lower the Apple subsidy to near that level, it would push a lot of dollars to the company's bottom line.

Of course, all those dollars in reduced subsidies would come off of Apple's bottom line.

So why don't Verizon and AT&T just do it? There's some scary history here. Back in the early days of the iPhone, Vodafone, Verizon's partner in its global wireless network, decided it wasn't going to pay Apple's price. The company then watched as customers left for carriers offering the iPhone. Verizon itself has some experience of life without the iPhone. Both AT&T and Verizon can be certain now that if one of them were to balk at Apple's price, the other would be more than willing to sell iPhones to disgruntled customers.

That still doesn't mean that Apple will be able to keep the iPhone subsidy at current levels forever. One of the reasons that Verizon and AT&T have been so supportive of Nokia's efforts to revive its smartphone business (no, it's not because the two wireless companies have a soft spot for Microsoft) is that they'd like another lever to use in their attempts to reduce the subsidies they pay to Apple and to the Android makers. Another phone-maker -- a hungry one willing to strike any deal in order to survive -- might be a very useful tool in this fight, if that company's phones can gain market traction.

So if you really want to track Apple's fortunes, pay attention to the battle between the company and the wireless carriers. I don't expect the subsidies to stay at current levels forever; what matters for Apple's stock is how quickly the huge margins that come from this these subsidies erode on a product that accounts for 43% of Apple's revenues and 70% of its profits.

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

At the time of publication, Jim Jubak did not own or control shares any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Apple and Nokia as of the end of June. Find a full list of the stocks in the fund as of the end of June here.

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Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

Click here to find Jubak's most recent articles, blog posts and stock picks.

Stocks mentioned in this article include Apple (AAPL), Microsoft (MSFT), Nokia (NOK), AT&T (T) and Verizon Communications (VZ).

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