Apple 2.0

Covering the business that Steve Jobs built

Verizon and Apple at loggerheads?

August 23, 2010: 9:05 AM ET

"Important details still being ironed out," writes analyst. Could T-Mobile and Sprint be next?

Apple (AAPL) needs another carrier to maintain the iPhone's current rate of growth in the U.S., says Kaufman Bros.'s Shaw Wu in a note to clients Monday, but it doesn't necessarily have to be Verizon (VZ).

According to Wu, Apple's share of AT&T's (T) 90-million subscriber base is approaching saturation. Verizon, with 93 million subscribers, would be the logical next step. But between them, Sprint (S) with 48 million and T-Mobile (DT) with 34 million, would get Apple into the ballpark.

In any event, Wu is convinced that something is about to happen:

From our checks with industry and supply chain sources and a recent SEC 10-Q filing by AT&T mentioning that exclusivity with "a number of attractive handsets" could end, we have conviction that the iPhone could likely finally be at another carrier besides AT&T here in the U.S. in 2011 and potentially at Verizon in 2011 or 2012... We believe the argument for AAPL to pursue Verizon sooner than later is to address the growing presence of Android. What better way to do that than where Android has seen the majority of its success?

But, he adds:

From our understanding, the Verizon negotiations are not finalized with important details still being ironed out, including technology and economics. We think it is premature to rule out T-Mobile or Sprint (who also uses CDMA but WiMAX for 4G). In addition, there is the possibility of multiple U.S. carriers being signed.

Drilling deeper into the effects of these possible new iPhone deals, he writes:

  • Margins and ASPs Could Compress. The potential downside with Verizon vs. T-Mobile and Sprint is that iPhone margins and ASPs would likely decline unless AAPL can convince Verizon to pay up. The reason is twofold: 1) we estimate that smart phone ASPs at Verizon are $200 to $500 with Motorola, HTC, and RIM as key suppliers, which compares to iPhone's $600; and 2) the exclusivity premium that AT&T pays to AAPL is likely at risk. We estimate this could be $50-100 per iPhone. Verizon arguably has a strong bargaining chip with the success of Android.
  • Some Sensitivity Analysis. We are currently modeling 54 million iPhone unit shipments for C2011 and believe Verizon could contribute an additional 2 million-3 million iPhones per quarter (assuming some cannibalization of AT&T) meaning 8 million-12 million in incremental units. We estimate this to have a $1-$2 EPS impact depending on margin and ASP assumptions. While this is a meaningful impact, it represents only 6%-11% on the $17.73 in C2011 EPS we are modeling.
  • iPhone Entrance Into Verizon Likely to Impact Android More Than BlackBerry. Contrary to popular opinion, we believe Android would likely be impacted more by iPhone being carried on Verizon than BlackBerry. The reason is that the features sets are closer and Android phones are being positioned as "iPhone alternatives". In our view, the BlackBerry demographic is different where customers prefer physical keyboards and messaging applications like email and Twitter are most important.

[Follow Philip Elmer-DeWitt on Twitter @philiped]

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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