The iPhone did incredibly well for Verizon during the holiday season with the sale of 4.2 million units of the device. Those impressive sales, however, bring a shrinking profit margin for the company.

Bloomberg reports that Fran Shammo, CFO of Verizon, said the company had to cut six percent off their profit margin. This was caused by the sizable subsidy that Apple slaps on every iPhone sold. The iPhone 4S sells for $199 with contract and Apple receives a $450 subsidy.

Shammo said that the company sells the devices at a loss to encourage people to sign up for contracts that last two years. These subscriptions are where Verizon did well with 2 million subscribers in quarter three of 2011, even though they are still trailing behind AT&T’s 2.7 million subscriptions during the same period.

To combat the high subsidies that Apple is putting on iPhones, Verizon has taken to increasing the price of their more popular high-end Android devices such as the Motorola Droid RAZR and Samsung Galaxy Nexus. The company now sells these devices at $299 with the Android licensees only getting $350 in subsidies.

Verizon did come out on top overall in the third quarter in total subscriber gains thanks to Android smartphones. The company earned 882,000 new subscribers while AT&T only signed on 319,000 new subscribers during the same quarter.

We won’t know exactly how well AT&T did during the holiday season until their earnings call on January 26. Regardless of who won between AT&T and Verizon during the holidays, the real winner was Apple. The company will reveal its holiday earnings on January 24 and is expected to set all-time records for iPhone and iPad sales.