Apple to ink Verizon-iPhone deal next year, analyst says

Customer complaints over AT&T's network, Verizon's bigger base will drive move

Apple will probably drop its exclusive deal with AT&T next year and offer its iPhone to Verizon subscribers as well, a Wall Street analyst said today.

The move will mean the end of Apple's "sweetheart" deal with AT&T, which pays Apple about $450 for each iPhone it sells. But the Cupertino, Calif. company will make up the shortfall in volume, Brian Marshall, of Broadpoint AmTech, said in a research note to clients today.

"AT&T's 'sweetheart' carrier subsidy (~$US450) for the iPhone would not be attainable at Verizon," said Marshall in the note. "[But] diverse carrier support is a key element in driving global penetration of the iPhone. We believe the chances are high the iPhone will find its way onto the Verizon network in the second half of 2010."

If Apple does drop its exclusive arrangement with AT&T, it wouldn't be the first time that the iPhone has been marketed, and supported, by more than one carrier in a market. During Apple's quarterly earnings call last week, Tim Cook, the company's chief operating officer, confirmed that Apple would soon expand its distribution deals in the U.K. and Canada beyond the exclusive arrangements it has with O2 and Rogers, respectively. On Monday, for example, Canada's TELUS announced it would start selling the iPhone 3GS on Nov. 5.

But a move to Verizon will affect Apple's ability to squeeze dollars out of U.S. carriers; AT&T currently subsidizes iPhone sales to the tune of $US450 per unit, Marshall estimated. "Apple will probably get $US300 from Verizon per iPhone," Marshall said in a follow-up telephone interview today. "That's the ballpark figure for smartphone subsidies."

If Apple sells iPhones to Verizon's subscribers, Marshall expects that AT&T will strike a similar subsidy deal, meaning it too will pay Apple around $US300 per phone. In the long run, however, that will put more money, not less, in Apple's pocket. Marshall pegged the additional revenue to Apple at around $US7 billion.

"Verizon has a 30 per cent larger post-paid base than AT&T, 81 million versus about 63 million for AT&T," said Marshall. If Verizon matches AT&T's ability to move users, and attract new ones, to the iPhone, the former will have sold about 14 million of the devices by the end of 2011. "That's a huge incremental upgrade in sales for Apple. And it's additive for the most part."

AT&T will lose sales if Verizon enters the iPhone market in the U.S. -- to the tune of about a half million units per quarter -- but the increase from Verizon will more than make up for AT&T's decline.

"Everyone is dissatisfied with AT&T on the iPhone, not only on voice, but data as well, especially in congested cities like New York and San Francisco," said Marshall, echoing complaints that go back more than two years to the launch of the original iPhone in the summer of 2007. "If Verizon starts selling the iPhone, AT&T is going to have an issue on their hands."

AT&T seems to see the same writing on the wall as Marshall. Last week, AT&T Mobility CEO Ralph de la Vega hinted that his company expects its rumored three-year exclusive deal with Apple will end next year .

"iPhone sales won't go away at AT&T, but the majority will be sold by Verizon," argued Marshall, if Apple does bring Verizon into the fold.

Other analysts, however, have countered that Verizon's move into handsets powered by Google's Android mobile operating system makes it less likely it will forge a deal with Apple and the iPhone.

For its part, Verizon remains puzzled why Apple went with AT&T in the first place. On Monday, Verizon CEO Ivan Seidenberg told analysts that Apple "wasn't interested" in striking a deal with his company two years ago. "I have no thoughts on why they did what they did," he said.

When Apple launched the iPhone, most analysts credited AT&T's willingness to bow to Apple's demands over the iPhone, including those that prevented the carrier from selling music or add-on applications, both traditionally carrier money makers, as a deciding factor for its selection as Apple's iPhone partner.

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