Verizon iPhone? Why AT&T shouldn't panic yetMarch 30, 2010: 7:45 PM ET
People tend to talk about the iPhone going to Verizon as if it would be all upside for Apple and Verizon, and all downside for AT&T. That's not quite correct.
It would be a big deal, however. Since its debut three years ago, AT&T (T) has been the exclusive U.S. network for the iPhone.
That arrangement has brought AT&T great benefits including higher revenues, lower customer defections, and a gaggle of tech-savvy customers who are more likely to buy other services like DSL and U-verse TV.
But it has also brought headaches. For one, AT&T pays Apple a lot for each iPhone – somewhere in the neighborhood of $650 – and essentially sells them at a loss to consumers, expecting to make the money back later in monthly fees. Those payments show up on AT&T's financial statement every time iPhone sales spike. For another, the iPhone has pushed AT&T's wireless network to the limit and beyond, prompting bitter complaints about dropped calls and slow connections, and sending the carrier scrambling to upgrade its equipment.
With all that in mind, here are some thoughts about the possibility of a Verizon (VZ) iPhone:
1. It's not a sure thing. The Wall Street Journal reported that Apple (AAPL) is having a CDMA iPhone made, but there's nothing saying that Verizon is going to get it. Yes, Verizon is the biggest CDMA partner out there, and I have little doubt that it will carry the iPhone eventually. But a CDMA phone might just be a fallback in case AT&T is unwilling or unable to give the latest iPhone the kind of launch (and network support) Apple wants. Which brings us to the next point ….
2. Apple might not want to give it to Verizon. Believe it or not, there are reasons for Apple to keep the iPhone right where it is, in AT&T's exclusive grasp. Why? Carriers pay a premium for exclusive hardware. They want phones that will lure customers away from their rivals, and keep them locked into monthly contracts. If the iPhone is available from both AT&T and Verizon, it's less valuable to both companies – so they'll almost certainly pay Apple less for each phone than the $650 or so Apple is used to getting. That's fine if you're willing to sacrifice profit margins in pursuit of market share – but that's a very un-Apple way of thinking. So what about AT&T? Well …
3. AT&T has been preparing for this. AT&T is well aware that iPhone exclusivity will run out eventually. Have you noticed the announcements of upcoming Android (GOOG) and Palm (PALM) phones? The gradual network improvements in cities like San Francisco? (I hear New York is still an iPhone black hole, though.) That's AT&T trying to boost customer satisfaction and build out a portfolio of strong phones so all that geek money won't run out the door when the iPhone pops up somewhere else. And finally …
4. AT&T doesn't want exclusivity forever. Folks who know the minds of AT&T's top brass say they're pragmatic about this. They know a day's coming when it won't make sense to continue paying Apple a premium to have the iPhone all locked up. As soon as the numbers show that the latest iPhone isn't delivering legions of loyal, high-end subscribers to AT&T – or as soon as a cheaper phone can deliver results in the same ballpark – I think we'll see that CDMA iPhone actually materialize.