Why Verizon's Big iPhone Deal Has Risk, Not Just Reward

By Gary Kim January 11, 2011

It's official: Verizon Wireless is going to be selling the Apple iPhone 4. Nothing has been said so far about rights to sell the iPad, though. 

It's easy to see the upside for Verizon Wireless as it now can sell and support the Apple iPhone. The iPhone is an iconic device and the inability to sell it obviously hurts any mobile provider that doesn't offer the device. Beyond that, the iPhone exclusivity arguably has allowed AT&T to gain some customers Verizon Wireless was not able to compete for, including, doubtless, many former Verizon Wireless customers. 

But there are challenges, as well. Verizon Wireless might have to spend $3 billion to $5 billion to subsidize customer purchases of the device in 2011 alone, based on the expected $400 per iPhone subsidy Verizon will absorb. That will hit profit margins, a concern analysts have had about AT&T as well. 

While the smartphone will help Verizon add more subscribers this year than rival AT&T Inc., currently the exclusive U.S. carrier for the iPhone, it will also crimp profits, said John Hodulik, an analyst at UBS AG.

Hodulik said Verizon may sell 13 million of the devices with an estimated $400 subsidy this year, which would add up to a total of $5.2 billion. Of course, some observers say Verizon Wireless will not sell nearly that many devices.

Verizon will sell only five million to seven million iPhones in 2011, argues Dan Hays, PRTM director. 

Still, a hit to earnings of $2 billion to $5 billion in a single year is a downside to the deal, according to BusinessWeek.

Some also will ask whether it is the iPhone on the 3G network or devices running on the new 4G network that ultimately will be more important. It would be hard to argue that Verizon "loses" from selling the iPhone on the 3G network. But it might profit more if it becomes the exclusive provider of 4G iPhones, one might argue. At least indirectly, Verizon Wireless expends marketing effort and capital to support the 3G iPhone, rather than 4G devices and features. 

Also, Apple has launched the iPhone 4 model every summer, and presumably an iPhone 5 is coming. But it's not clear when Verizon would get it. The carrier may be on the same one-year upgrade cycle, so Verizon may have to wait until January and leave AT&T with the advantage of a fresher model in the fall. 

Most important, cell-phone companies do their best to tie subscribers up with contracts and limit their mobility. AT&T executives last year stressed to investors that most of their iPhone users are on family and employer plans -- more difficult for an individual to switch from.

One possible advantage for Verizon Wireless is the ability to grab some AT&T customers using iPhones who are experiencing service issues. Most Verizon iPhone buyers likely already will be Verizon customers, so the customer and revenue impact will be more muted than for cases where Verizon can actually shift a customer from AT&T to itself. John Hodulik at UBS estimates that 77 percent of his projected 13 million Verizon iPhones activated in 2011 would go to current Verizon subscribers. But three million customers taken from a key competitor would be a big deal.

But all of that is likely to work out favorably for Verizon Wireless. About the only clear negative is the estimated $400 subsidy Verizon Wireless will incur for nearly every iPhone it activates. That is one reason some have argued that support for rival devices is not a bad strategy: device subsidies are lower.

Want to learn more about wireless? Come to the 4GWE Conference. To be held Feb. 2-4 in Miami and collocated with ITEXPO East 2011, the 4GWE Conference -- including the Regulatory 2.0 Workshop -- will focus on the realities of deploying 4G technologies and delivering broadband wireless applications to a growing community of wireless broadband consumers. Don’t wait. Register now.

Gary Kim is a contributing editor for TechZone360. To read more of Gary’s articles, please visit his columnist page.

Edited by Tammy Wolf

Contributing Editor

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