Apple's exclusive deal with AT&T to offer the iPhone may end within the year, according to a prediction from financial analyst Gene Munster, a senior research analyst at Piper Jaffray.
If Munster is correct, opening up the iPhone to other carriers in the U.S. could be a boon for Apple, which would likely see iPhone sales go through the roof. On the flipside, if this prediction were to come true, it would likely mean very bad news for AT&T, which has relied heavily on the iPhone to boost its own wireless sales and revenue.
(Credit:
Apple)
Munster noted recently in his published research that Apple has been moving away from exclusive deals in other countries, according to AppleInsider. Specifically, in France the company ended an exclusive deal with Orange and opened up the device to multiple carriers. Munster said the change pushed the iPhone's marketshare upward to about 40 percent in France. In the U.S., where the iPhone is exclusively offered through AT&T, the iPhone has a marketshare in the teens.
There are several other countries where Apple has a multi-carrier model. In fact, its most recent deal with China Unicom to bring the iPhone to China is also not exclusive. Apple declined to discuss which carriers it might be in talks with, but analyst firms such as Piper Jaffray expect Apple to sell more than 3 million iPhone units in China next year.
Details of Apple's relationship with AT&T have never been made public. But many people have speculated that the exclusivity contract with AT&T would last at most five years from when the first iPhone hit the market in 2007. This would mean that AT&T would have exclusive rights to the iPhone until around 2012.
There have been reports more recently that AT&T has continued its negotiations with Apple to keep the iPhone exclusive through at least 2011.
Still, rumors have circulated that Verizon Wireless is also talking to Apple about getting the iPhone on its network. Verizon executives have hinted that some kind of Apple device will likely operate on its new 4G wireless network, which is expected to launch commercially next year. But what's been less clear is whether or not a 3G iPhone will operate over Verizon's network.
Verizon Wireless is currently the largest wireless operator in the country. And it has consistently won accolades for solid performance on its network. But because its current 3G wireless network is based on CDMA technology rather than GSM, which is what AT&T and most other carriers around the world use, offering the device on Verizon's network would require an additional radio to be added to the device.
While this is not a trivial task for Apple, the opportunity to offer the iPhone to Verizon's millions of potential new subscribers would likely provide a big incentive to redesign the iPhone's radio technology.
As Apple's iPhones grow in popularity, there are strong indications that opening the device up to other carriers in the U.S., such as Verizon, would greatly boost iPhone sales and market share. The company's latest phone, the iPhone 3GS introduced in June, is likely the company's most popular device. Munster even noted in his report that the new iPhone "seems to have exceeded Apple's internal expectations."
The timing in the U.S. could also be right to end the exclusivity deal with AT&T as Congress, the Department of Justice, and regulators at the Federal Communications Commission look into the fairness of such exclusive deals. Opening the device up to other carriers could help score points with regulators and potentially end some of these investigations.
But ending its exclusive deal with Apple could spell big trouble for AT&T. For one, the iPhone has helped AT&T attract new customers. About 40 percent of AT&T's 10 million iPhone customers switched to AT&T from another carrier, the company has said.
But more importantly, the iPhone has helped AT&T keep existing customers. Since the third quarter of 2007, AT&T's churn rate, or the rate at which it loses customers, has fallen to 1.49 percent from 1.7 percent, according to a story in The Wall Street Journal. Meanwhile, Verizon Wireless' churn rate has risen during that time period to 1.37 percent from 1.27 percent.
The iPhone has also helped AT&T bring in more revenue. AT&T claims its iPhone customers spend more each month than its average post-paid wireless customers--about $100 a month. This has helped boost its overall revenue per user by about 4.7 percent to $60.21 per month since the third quarter of 2007.
But the cost to AT&T for these benefits has been high. Since last year, the company has been paying about $400 per iPhone to subsidize the cost of the device in exchange for requiring customers sign up for a two-year service contract. Even though AT&T is guaranteed at least $30 a month in data service fees, the company admits that the subsidy has hurt its short-term profit margins.
What's more, because iPhone users download two to four times as many games, video, and other Web data as other smartphone users, AT&T has had to upgrade its network to keep up with demand.
Even though AT&T has been upgrading its network, customers have complained often about its poor performance. And this has had a negative effect on the company's reputation. When subscribers experience problems with the iPhone, they often blame AT&T rather than Apple for the problem.
Because AT&T is the only carrier in the U.S. to offer the device, iPhone users regardless of whether they are satisfied with AT&T or not have been forced to stay on the network as long as they want to continue using their iPhone.
But if other carriers, such as Verizon, were to offer the iPhone, AT&T could see many of its existing iPhone customers leave. And it would likely cease to see any substantial uptick in new customers due to iPhone sales.
AT&T executives have said they realize that the iPhone exclusivity deal won't last forever. And they say they are prepared for that day. But the truth is the longer the company can keep the iPhone exclusive to its network, the better off it will be.
However, it looks like AT&T's chances of holding onto the iPhone in the U.S. for much longer are getting slimmer and slimmer. Even though Apple has said that it's happy in its relationship with AT&T, it only makes sense for the company to get out of its exclusive deal as soon as it can.
There is still no official word about when or if Verizon Wireless will ever get Apple's iPhone, but the wireless operator has confirmed it will be getting the Palm Pre early next year.
The company's chief operating officer, Denny Strigl, spilled the beans on the impending smartphone availability during a conference call with analysts and investors discussing the company's second-quarter earnings on Monday. The Palm Pre, which was highly anticipated for several months, is currently only available on Sprint Nextel's network.
Since Sprint and Verizon use the same underlying cell phone technology, it shouldn't come as a huge shock that Verizon would be getting its own version of the Pre. But it's somewhat surprising that the carrier will be getting the device so soon.
Earlier reports indicated there might be a longer wait for a Verizon Palm Pre. Just before the Pre was launched in early June, Sprint Nextel's CEO Dan Hesse threw cold water on a statement made by Verizon Wireless CEO Lowell McAdam that Verizon would offer the Pre on its network within six months. Hesse wouldn't provide details, but he indicated the exclusivity deal between Sprint and Palm lasted longer than six months.
"They need to check their facts," Hesse said in an interview at a press event the day before the Pre was launched. "That just is not the case. Both Palm and Sprint have agreed not to discuss the length of the exclusivity deal. But I can tell you it's not six months."
Now it appears that Hesse may have been simply parsing words. If Verizon does in fact offer the phone in early 2010, that makes the deal technically longer than six months, but not by much.
A Sprint representative declined to comment on the news that Verizon plans to offer the Pre early next year.
So why is this so important? There are a couple of reasons.
For one, Verizon is in desperate need of some hot new phones on its network. Even though Verizon Wireless has always gotten high marks for its reliable wireless network, it has often been seen as a laggard in terms of getting the hottest new cell phones. AT&T has the exclusive deal with the iPhone. The first and second Android devices are being sold by T-Mobile USA. And Sprint Nextel was the first out of the gate with the Palm Pre. Verizon Wireless has an exclusive deal to carry the BlackBerry Storm, but many loyal BlackBerry users have complained about the touch screen. Research In Motion is readying a new version of the phone for later this year.
For several months, rumors have been flying that Apple might be readying an iPhone for Verizon. And many loyal Verizon subscribers, who don't want to leave the carrier, but really want the iPhone, have been waiting for news of a Verizon iPhone. But such an announcement is not likely coming anytime soon.
Strigl's announcement could give these wireless customers and others looking for an alternative to the iPhone, a reason to stay with Verizon Wireless. Strigl admitted during the conference call that the iPhone 3GS, which went on sale in mid-June, hurt Verizon Wireless' sales the last two weeks of June.
"The iPhone has clearly been a successful device," Strigl said. "And it has expanded the overall phone market. We have been competing successfully and will continue to do so. But we did see an uptick in the last couple of weeks in June. (Still,) we think we are extremely well-positioned going forward. The lineup and pipeline of new products we have coming is strong."
The importance of exclusive deals
But the calculated terminology used to describe these deals also indicates just how important exclusive handset deals have become in the competitive wireless market. Carriers see exclusivity on hot new handsets as a way to lure new customers and keep old ones. Recently, these deals have come under scrutiny as members of Congress, the Federal Communications Commission, and the U.S. Department of Justice have all started looking into these deals to determine whether they are really good for consumers and the market in general.
Even Verizon, which has voluntarily offered to limit its exclusive handset contracts to six months, defends exclusive deals. Strigl said during the call that these deals are necessary to spur innovation and competition in the wireless market. He pointed to the Apple iPhone as an example.
Clearly, the iPhone deal has proven to be a major advantage for AT&T. The company announced that it had signed up 1.4 million new subscribers in the second quarter of 2009, about 300,000 more than Verizon signed up during the same quarter. AT&T also said it activated 2.4 million iPhones in the second quarter. And Steve Jobs, the CEO of Apple, said that more than 1 million units of the new iPhone 3G were sold the first weekend the device was available.
Even though AT&T is taking a financial hit in the short term due to the heavy subsidy it pays on each iPhone sold, the company believes its deal with Apple for the iPhone is an investment in the company's future. Already, the company has increased its average revenue per user due in large part to the $30 a month data fee that is required for each iPhone sold. And because these subscribers are locked into a two-year service contract, AT&T sees the iPhone becoming a profit center in a couple of years.
What's more AT&T says that analysis of its iPhone customers indicate that they not only spend more than other wireless subscribers, but they also are more loyal.
And the only reason that AT&T has been able to reap all these rewards is because it is the only carrier offering the iPhone. If it had to share the iPhone with another carrier, like Verizon, it would drastically reduce the effect the phone has on its future profitability.
But can other devices follow in the footsteps of the iPhone and create so much value for a carrier? It seems unlikely. While some people may argue that the iPhone is by no means the best smartphone on the market, most people would agree that it has raised the bar in terms of features, functionality and usability of smartphones.
So far no other single device has created the same buzz or sales traction that the iPhone has created. For example, the Pre, which was highly anticipated since it was announced in January at the Consumer Electronics Show, only sold about 50,000 phones its first weekend.
For most carriers, exclusive deals with smartphone manufacturers have been used to retain existing customers rather than an attempt to grow its base. T-Mobile USA actually rewarded its loyal T-Mobile customers by offering its new Android phone, the MyTouch, to them weeks before it offered it to non-T-Mobile customers. And Sprint Nextel actually held special parties the night before the Palm Pre launch to allow loyal Sprint customers to buy their pre-ordered devices.
Even AT&T admits that the iPhone will one day be sold by other carriers.
"There will be a day when we are not exclusive with the iPhone," AT&T's CEO Randall Stephenson said, speaking last week at Fortune's Brainstorm: Tech conference. However, he declined to get into details on the company's negotiations with Apple.
Apple's CFO Richard Lindner said during the second-quarter conference call that high iPhone sales volume has laid the groundwork and will continue to pay off years from now, even when the iPhone is eventually offered by other carriers in the U.S.
While Verizon defends the need for exclusive deals, the company has always competed on the merits of its network. The Palm Pre will simply give its customers another compelling smartphone choice. And it will give Palm a greater opportunity to sell handsets, given that Verizon is now the largest wireless operator in the U.S.
Verizon Wireless has long contended that it takes more than a single iconic handset to win in the wireless market long term. And this is why the company plans to build its new 4G wireless network. Strigl also announced during the call that Seattle and Boston would be the first two cities where the new 4G wireless network will be tested later this year. The network is expected to be commercially available in 2010. And it will be completed sometime in 2013.
Verizon executives have also said the company plans to offer its own application store for smartphones. Details of the new store will be released on Tuesday at the company's developer conference in San Jose, Calif.
Verizon Wireless said Friday that it will modify its cell phone exclusivity deals to ensure that smaller carriers get access to hot new phones more quickly.
In a letter dated July 17, Verizon Wireless CEO Lowell McAdam told key members of Congress that Verizon Wireless, which is the largest wireless service provider in the country, would allow smaller wireless operators with fewer than 500,000 customers to offer phones it was offering exclusively to Verizon customers after six months. Some exclusivity deals that Verizon has had with handset makers have lasted years.
McAdam sent the letter after lawmakers on Capitol Hill have questioned the practice of large cell phone companies striking long exclusive deals with certain handset makers, essentially ensuring that smaller operators that often serve rural areas do not get access to the hottest phones. The Federal Communications Commission and the Justice Department have also been looking into the practice.
The most publicized exclusive cell phone deal is AT&T's multiyear contract with Apple to be the exclusive carrier of the popular iPhone. Consumer groups have long complained that consumers living in areas not served by AT&T have been completely shut off from getting the latest and greatest cell phone technology in the iPhone.
In what looks like an effort to head off any legislation from Congress or further action by the FCC and Justice Department, Verizon said it would amend its policy to ensure that smaller carriers get access to new phones as well.
"Any new exclusivity arrangement we enter with handset makers will last no longer than six months - for all manufacturers and all devices," McAdam wrote in the letter.
But McAdam also defended the practice of exclusivity deals and said that the company still plans to strike such deals with handset manufacturers.
"Exclusivity arrangements promote competition and innovation in device development and design," he said in the letter. "This new approach is fair to all sides."
It will be interesting to see if any of the other major cell phone operators follow Verizon's lead on shortening the time it has exclusive deals. If not, it seems unlikely that such a move by a single operator would be enough to appease law makers and government regulators.
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