Verizon Needs The Apple iPhone More Than Apple Needs Verizon

Verizon Needs The Apple iPhone More Than Apple Needs Verizon 

The Set-Up

Verizon and AT&T are "dogs of the Dow." The two companies are like giant sequoias duking it out for root space, each attempting to grow and spread its roots in the cellular space occupied by the other. Combined the two companies control almost two-thirds of the domestic market for cell phone services (based on subscriber totals) and both companies are attempting to quickly transition from traditional landline service providers to preeminence in wireless products and services. Both companies pay rich dividends, both companies are under performing for shareholders, and only one has the Apple iPhone.  Which one? AT&T. The company that's on the cusp of replacing Verizon as the #1 wireless services provider in the nation.

AT&T ended the June quarter with 90.1 million wireless subscribers, adding 1.6 million net subscribers. Verizon ended the June quarter with 92.1 million subscribers, adding 1.4 million net subscribers.

It's not a coincidence AT&T's emergence as a rival for the top spot (and the company's resurgence as a leading wireless services provider) has occurred while having an exclusive contract for voice and data services for the Apple iPhone.

The Verizon Rumors and Speculation

The rumors and speculation about iPhones for the Verizon network have picked up again. Last November I made the case a deal with Verizon for the iPhone was all but inevitable suggesting the end of 2010 as the ideal target date.

On Friday Philip Elmer-Dewitt in an Apple 2.0 column, referencing John Gruber's argument for a Verizon iPhone by January, has fanned the flames of speculation a Verizon deal will occur by early next year. To his credit PED (the initials by which Philip is commonly referred on the Apple Finance Board) has been consistent in reporting on the persistent iPhone on the Verizon Wireless network rumors since they first began. 

These serial rumors are as old as the iPhone itself due to Apple's early acknowledgment Verizon was provided a first look at the iPhone and passed on the offer to be the exclusive domestic carrier before Apple crafted its relationship with AT&T. Verizon's decision to pass on the iPhone is one the most talked about tech industry blunders of the past several years. 

No matter Verizon's efforts to turn the tables on Apple and force an iPhone deal through the high-profile launch of the Android-based Droid and repeated public attacks on the perceived poor quality of the AT&T cellular network, a deal with Apple for the iPhone has remained elusive. 

Why Verizon Needs The Apple iPhone More Than Apple Needs Verizon

It's common when people speculate on an iPhone deal with Verizon (or Verizon Wireless - the joint venture between Verizon Communications and British-based Vodaphone Group of which Verizon owns a majority stake) to mention how much a Verizon deal would benefit Apple. Few people mention the benefits of an iPhone deal for Verizon. Perhaps it's an implicit understanding Verizon needs the iPhone and I believe Verizon needs the Apple iPhone far more than Apple needs Verizon. 

iPhone 4 supply is constrained on a global scale. Apple, a company I forecast to achieve $65 billion in revenue in the fiscal year ending in September, can not manufacture enough iPhones at this time to meet demand. Verizon deal or no Verizon deal, the iPhone remains an extraordinarily popular product. In the 2nd calendar quarter AT&T activated a record-breaking 3.2 million iPhones on its network. While a Verizon deal is widely expected to increase demand for the iPhone, until there's sufficient supply of iPhones increased demand doesn't sell a single phone. 

In a subsequent column also published on Friday, PED references a ChangeWave Research report that indicates 31% of current US iPhone owners would likely switch to Verizon if an iPhone deal was consummated between the two companies. But it's of little interest to Apple to consummate an iPhone deal with Verizon just so iPhone owners can change carriers for their next contract. Rather, PED's column illustrates how much Verizon needs the iPhone in order to grow and maintain the #1 position among domestic wireless service providers. 

Apple isn't interested in a Verizon deal to pick up more demand. Apple's interest in a Verizon deal is for Verizon to deliver its best Wireless customers to Apple and do so in a way that siphons handset revenue from the Android market and creates post-purchase revenue opportunities from a predominant position in the three-way relationship with the customer. 

Essence Of A Verizon Deal - The Way Apple Approaches The Market

There's no doubt a Verizon deal would create event greater iPhone demand and there's little doubt millions of existing domestic customers would consider jumping to Verizon for their next iPhone contract. But there's more to a deal with Verizon than iPhone demand and desires of consumers for an iPhone on the Verizon network. What's a bigger deal is the manner in which both Verizon and Apple approach their respective customers and markets. 

Under the current arrangement with AT&T, Apple predominates the carrier in the relationship with the iPhone customer. AT&T takes a subordinate position in the three-way relationship. What must occur for Verizon to secure a contract with Apple for the iPhone is a willingness to subordinate its position with the customer and cede the typically predominant position of the carrier to Apple. All of the technical and network compatibility issues aside, when a deal is struck with Apple for the iPhone is when Verizon chooses to accept Apple's demand for the prominent position in the relationship with the customer.  Apple will have it no other way. 

Passing On The Original iPhone

Verizon's decision to pass on the original iPhone has been a humiliation for the company. The prospects of a deal for the Apple iPhone following AT&T's success with the product is a recurring question from analysts on Verizon's quarterly conference calls. 

Recently, IE Market Research, a Canadian research company, issued a report suggesting AT&T will surpass Verizon in wireless market share as both enterprises grow their respective subscriber base and collectively control just over two-thirds of the market. Both companies market handsets to customers and both market smartphones. The primary differentiator between AT&T and Verizon in the wireless market at this time is AT&T's exclusive contract for the Apple iPhone. 

The Bottom Line

Verizon is forecast to have negative revenue growth in its current fiscal year and eke out meager revenue growth of 1.1% in the fiscal year beginning in January. AT&T is expected to grow revenue .7% this fiscal year and 1.3% next fiscal year also beginning in January.

Both companies see the lucrative smartphone market as the pathway to revenue and earnings growth. For now one company has the iPhone. Apple makes it. AT&T has it. Verizon wants it. iPhone Supply will eventually meet up with demand. The question for Verizon isn't whether or not it needs the iPhone. The question is how soon Verizon will accept Apple's terms to get it. 

Apple has no trouble selling iPhones with or without Verizon. But Verizon can not keep AT&T from surpassing it in subscriber growth without the iPhone. In the June quarter 27% of the record 3.2 million iPhone activations were to customers new to AT&T. The iPhone is a huge customer draw for AT&T in its battle with Verizon for wireless market share and subscribers.

Apple's interest in a deal with Verizon isn't to provide a channel for iPhone customers to migrate from AT&T to Verizon. Apple's interest in a Verizon deal is for Verizon to deliver its best and most lucrative customers to Apple at the expense of Apple's competitors. Either subordinate its position in the relationship with the customer to Apple's position with the customer or watch AT&T surpass it in wireless subscribers. 

AT&T and Verizon: Two giant sequoias duking it out for root space and both needing the iPhone to grow. 

Robert Paul Leitao