The wireless industry is buzzing with rumors that Verizon Wireless will be selling Apple Inc.‘s (AAPL) iPhone by early 2011. Verizon Wireless is a venture between Verizon Communications (VZ) and Vodafone Group Plc (VOD).
If Verizon starts selling the iPhone, AT&T Inc. (T) will lose its exclusive hold on the iPhone, giving Apple an opportunity to expand availability of the product through other mobile service providers. Several industry researchers estimate that Verizon’s release of the iPhone will drive Apple’s U.S. sales higher by at least 5 million units in 2011.
The anticipated alliance with Verzion Wireless will also provide Apple a stronger position over its rivals Research In Motion Ltd. (RIMM) and Motorola Inc. (MOT), whose smartphones are currently promoted by Verzion Wireless. The availability of Apple’s iPhone through Verizon may drive down market share of Research In Motion, Motorola and Google Inc. (GOOG).
Verzon’s biggest rival AT&T is the leader in selling iPhones in the U.S.; it has done so since June 2007. The iPhone facilitated AT&T by adding more subscribers even when the U.S. mobile-phone market was nearing saturation. In the second quarter of 2010, AT&T added 1.6 million subscribers, reaching 90.1 million total subscribers in service, up 14.2% year over year, driven by strong iPhone activations. This represents an all-time high quarterly net addition in the history of AT&T.
However, while iPhones are delivering strong growth momentum, high marketing costs associated with the products (especially due to the heavy subsidy associated with iPhone 3G/3GS) were affecting AT&T’s earnings. AT&T is currently paying a hefty subsidy of approximately $300 per phone to Apple, which is dilutive to the company’s earnings.
AT&T has withdrawn customer retention initiatives across the company’s segments. Verizon is involved in an increasingly expensive promotional campaign against AT&T to aggressively position its newly launched Droid against the iPhone.
The end of AT&T’s exclusive hold on the iPhone will provide Verizon a boost in its competition against other smartphones. We believe Verizon’s partnership with Apple will drive its earnings in the near term.
Gross subscriber additions at Verizon Wireless remain strong and the monthly churn rate (customer switch to competitor) is one of the lowest in the industry. Expansion of FiOS services remains an integral part of Verizon’s long-term growth strategy. Increased market penetration of the FiOS footprint and the roll-out of the 4G Long-Term Evolution service (planned for fourth quarter 2010) are expected to strengthen Verizon’s market position against its major rivals.
We are currently maintaining our long-term Neutral recommendation supported by the short-term Zacks #3 (Hold) Rank for both Verizon and AT&T.
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