Every quarter, at least one analyst suggests that Apple is about to
move to Verizon - and that the great incentive is the additional iPhone
sales.
In the March quarter, with a 131% year-over-year increase and a
record quarter for iPhone sales, Apple showed that it can do very well
without Verizon.
Verizon's Gamble
Verizon's gamble is that its network and customer base is so
attractive that Apple would have to agree to terms and make a special
CDMA
iPhone (the iPhone has always been a GSM device). Instead, Verizon is
having to pour money into its next generation LTE network far faster
than originally planned while watching AT&T's average revenue per
user increase and churn rate decrease because of the iPhone.
In other words, the iPhone effect is more powerful than the network
effect, and Verizon is having to fund its network improvements from
customers who pay less.
Little Incentive for Apple
With the latest figures from AT&T, it is obvious that there is
little incentive for Apple to add Verizon to the list of iPhone
carriers until Verizon can support the standard GSM iPhone.
Last quarter, the iPhone attracted more than twice as many net new
postpaid contract customers to AT&T as the heavily promoted Droid
and all of the other offerings did to Verizon. If Verizon had gone the
route of the Canadian CDMA carriers, such as Telus, and installed
network wide HSDPA
7.2, it might have had the iPhone when the exclusive period of Apple's
contract with AT&T ended.
Although Verizon's standard line now seems to be "it's up to Apple",
it would take some strong financial incentives to move Apple fast -
like say the 5 million WiFi-free iPhones China Unicom is said
to have agreed to buy over three years.
The iPad Factor
As Verizon doesn't yet have a competitive iPad 3G service offering,
this seems unlikely. It would be so easy, in marketing terms, to put
together an offer like AT&T's, where customers only commit for a
month at a time. What a great way to let them experience just how good
the Verizon network is!
Or maybe that's the problem, as Verizon has about half the WiFi
hotspots of AT&T and needs to have enough of the LTE network
in place to be competitive. The earliest this looks likely is the
holiday quarter this year, and Verizon is between a rock and a hard
place. Either it offers an iPad package by Christmas and risks being
shown up in all the areas where there is no LTE coverage, or it gifts
to its main competitor all the users of this year's hot Christmas
present.
iPhone Optimized for GSM and WiFi
The critical decision for Verizon was Apple taking the iPhone
processor design in-house. Apple has recognised that crucial factors
for taking over the mobile market are speed, screen (resolution and
viewing angle), and battery life. To get the latter as long as
possible, the A4 design is optimised for GSM and WiFi.
Then there are the costs of supporting a world phone that works on
both CDMA and GSM. Unless Apple chose to go with a GSM model and a
worldphone model, which would complicate technical support through
Apple Retail, it would end up paying substantial royalties to Qualcomm
on every iPhone with CDMA.
Then there is the issue of mutitasking, which will be in iPhone OS
4.0, as CDMA does not allow phone calls and data download at the same
time. So, for instance, if you're talking in the car, you still want
the iPhone navigation system to keep working and alerts like speed
traps to keep coming in. This all makes supporting Verizon and Sprint
on CDMA, an old technology standard that both companies are moving away
from, a luxury that Apple has chosen not to afford, because of how it
impacts the iPhone difference for other markets.
Looking for a Better Network
Although surveys seem to show that users want to move from AT&T,
what they want is everything they love about the iPhone on a better
network, a network where there are no dropped calls and high speed
downloading is always available - the usual nirvana. Comparing the good
reports from this year's
SXSW in Austin with last year's, when few were able to use their
iPhone consistently before the last day, it is clear that AT&T's
network investment is working and that the Verizon advantage can be
reduced.
Those who want freedom for the iPhone don't want freedom for the
carriers to give you what they want. This is the Android problem that
Google is struggling against with the Nexus One. When there is little
incentive to update you and keep your cellphone working as well as
possible, the carriers won't. After all, they have your contract for 18
months or two years, and they have new cellphones to sell.
Unless Google can solve this, Android will become the brand for
those who like to control as much as possible of their cellphone, who
want to search around the Web for the latest software and mods, while
Apple continues to expand its sweetspot - selling to people who want
their electronics to just work.
Better Markets than Verizon
Even if Apple suddenly - and against all its history - feels the
need to expand the brand so customers look on the iPhone experience as
being partly carrier dependent, there are more attractive partners than
Verizon. China Mobile has over 500 million users and, according to a
Kathryn Huberty (Morgan Stanley) reseach note, there are 50 million
Chinese who could buy an iPhone. DoCoMo still dominates the Japanese
market and, given KT's fast start with over 500,000 sold, Korea too
looks interesting.
These are all markets where the carriers want to work with Apple if
the iPhone economics works for them. These are all markets where the
carriers haven't spent much time and money trying to trash the iPhone
and then promoting their in-house premium brand Droid against it.
iPhone vs. Droid
How would Verizon promote the iPhone, now that it has Droid? Having
all those outlets available for the iPhone is a lot less interesting if
the iPhone is buried at the back of the store. It would be a return to
the old days of shopping for a Mac among racks of PCs and dealing with
staff who are motivated to sell you something else.
Further, Verizon won't want to drop Droid after investing over $100
million in advertising when it can use the Droid brand to sell millions
of handsets and has the opportunity of being this quarter's vendor to
play the various Android manufacturers (members of the Open Handset
Alliance include Acer, ASUSTek, Ericsson, Garmin, HTC, Huawei, LG,
Motorola, Samsung, Sony Ericsson, Toshiba, and ZTE) against each other.
Unless it fails, Android is likely to become the Verizon house brand
sold by preference in all of its outlets.
A Change of Management at Verizon?
It may take a change of management at Verizon for there to be an
iPhone future, in the same way that it took a change of management at
Disney for Pixar to stay there.
Vodaphone,
which already owns 45% of Verizon, has talked about buying the rest.
Like Verizon, it initially missed out on the iPhone. Realising this was
a mistake, it became the third iPhone carrier in the UK. Vodaphone
launched the iPhone in January and sold 100,000 to its customer base of
around 19 million in the first week - sales figures Google would have
loved for the Nexus One on T-Mobile.
Vodaphone knows the benefits of having the iPhone and has a good
idea of how badly not having it is affecting Verizon's business.
Verizon as a Negative Example
In any case, Apple gains from having Verizon as an example of what
happens if you don't seize the Apple opportunity when
Steve Jobs offers it to you. Since the launch of the iPhone,
AT&T has outgrown Verizon quarter by quarter. Verizon had to
buy
another carrier (Alltel) to get out in front with subscriber
numbers. Last quarter, AT&T took another half-million subscribers
off that lead after 900,000 new customers came for the iPhone.
If Apple sells around 2 million iPads this quarter, that
alone could cut another 1 million from Verizon's shrinking lead. Every
time a new iPad user tries out AT&T and gets good service for a
month, he will think all
the negative noise about size of the network is just noise and be
ready to move when the cellphone contract is over. This could boost
subscriber numbers quickly.
By the time Verizon's LTE is truly ready, AT&T could be ahead
again.
Verizon Gives AT&T Incentive to Improve
Verizon is still useful to Apple though - it gives AT&T an
incentive to improve its network, and the better AT&T's network,
the more iPhones Apple sells. It stops Apple from being subjected to
the monopolist slowdown when it wants to take over another company -
who knows if and when Google will be allowed
to buy AdMob - and it forces competitors' costs up, as they need to
launch and support their phones on CDMA and GSM to stand a chance of
getting traction in the market.
If Apple wants to continue its exclusive arrangement with AT&T
in the US, we can expect Apple to put forward the arguments on costs
and lack of monopoly in the smartphone market to the FCC or the Senate
subcommittee looking at handsets. It will be difficult for either body
to demand that Apple suffer damages so Verizon can regain ground lost
from making poor decisions, and since the FCC lost
the case on net neutrality, it will have problems convincing Apple
and AT&T that it has the right to regulate this area without a new
telecom bill.
The Obama administration currently has other priorities.
Growing the Market with the Next iPhone
We should see the new iPhone
in June. The anticipated two-thirds increase in processor speed alone,
with a 1 GHz A4 processor (vs. 600 MHz in the iPhone 3G), will
fill the lines outside the Apple Stores on Day 1. Adding in the better
battery life and better resolution, it should be another record iPhone
quarter, if Apple can launch early enough and ramp up the production
fast enough. 
Further Reading
