Philip Cusick

J.P. Morgan: Verizon is getting its iPhone reward this quarter

December 4, 2011: 6:45 AM ET

The carrier will add an estimated 1.2 million new accounts, more than double AT&T's

Data: J.P. Morgan. Chart: PED

"Santa's Sleigh Needs More Room for iPhones." That was the headline on a note to clients Thursday by Mark Moskowitz, who follows Apple (AAPL) for J.P. Morgan. Moskowitz was upping his iPhone sales estimate for the current quarter from 25.3 million to (a still relatively conservative) 28 million.

"Christmas Is Coming Early for Verizon" could have been the headline for Friday's note by Moskowitz' colleague Philip Cusick, who covers telecom services and towers for J.P. Morgan.

Cusick predicts that thanks largely to the iPhone, new postpaid (i.e. subsidized) cellphone accounts among the four major U.S. carries will be up 54% from last quarter. And of that 54%, he expects Verizon to get the lion's share. He estimates:

Verizon (VZ), which got the iPhone in February, will add 1.2 million new accounts
AT&T (T), which has had it since 2007, will add 450,000
Sprint (S), which got the iPhone last month, will add 250,000
T-Mobile (DTE.DE), which does not sell the iPhone, will lose 400,000 accounts

"Verizon is benefiting against all carriers compared to the third quarter," Cusick writes. "iPhone sales seem to be tracking well above carrier and vendor expectations and could negatively impact margins in 4Q."

That last bit -- higher sales hurting profit margins --may seem counterintuitive, but the carriers are set up to lose money on the phones they subsidize and take their profits later, in monthly fees collected over the life of a contract.

This is important because the subsidies on Apple's phones are particularly high. Cusick estimates that the average iPhone subsidy is $350 at Verizon, $375 at AT&T and close to $400 at Sprint. This compares to about $150-250 on similar Google (GOOG) Android devices.

Cusick's note is chock full such insights. Quoting from his summary:

  • Smartphone share overall tracking higher. We expect smartphones to be 74% of postpaid handset sales this quarter, with half of that from iPhones. Higher iPhone sales have taken some momentum out of other smartphone (Android/RIM/WM7) sales, which we estimate will be down 9% q/q and down 6% y/y. Smartphones should be ~52% of postpaid industry devices at year-end, including 42% at Verizon (46% of phones), 58% at AT&T, 66% at Sprint, and 50% at T-Mobile.
  • iPhone volumes high despite short supply. We believe iPhone sales are tracking near 6m units at AT&T, nearly 4m at Verizon, and 1.75-2m at Sprint. Availability of devices is tight, with up to a 2-week wait for certain models at Verizon and AT&T, and 1 week at Sprint.
  • Verizon, pushing 4G sales but people want iPhone. To counter iPhone demand VZ has a promotion to double the data cap – to 4GB for a $30 plan and 10GB for a $50 plan on 4G phones vs. our estimate of 1.25 GB/month average usage on 4G and ~800 MB/month 3G iPhone/Android (slightly lower at AT&T).
  • Sprint iPhones could be 1.75-2m units – at high-end of expectations. We believe Sprint is seeing strong iPhone sales this quarter including a lot of upgrades and good mix of new customers. Sprint seems to be doing better against T-Mobile and marginally better vs. AT&T, but worse vs. Verizon since the launch of the iPhone. Sprint needs to gain >259k postpaid subs to get to full-year positive and begin to justify its huge iPhone expense.
  • Usage tracking higher. We estimate that Verizon's postpaid data usage is up 125% overall y/y and 113% on the CDMA network alone. At AT&T we estimate network usage is up 104% y/y, lower than VZ both because of slower smartphone and data- device growth. For 2012 we forecast ~60% y/y data usage growth.

Note that although Cusick expects Verizon to add more new accounts this quarter, he expects AT&T will sell more iPhones. Presumably that's because compared with Verizon, AT&T has millions more existing iPhone customers, many of whom will be upgrading to the iPhone 4S for the holidays.

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