Selling The News: Verizon’s iPhone
The worst-kept secret in the wireless industry was confirmed Tuesday, as Verizon announced it will start selling Apple’s iPhone 4 February 10. The news drew little enthusiasm from investors, largely because it has already been priced into Verizon’s share price.
Estimates are varied, but most analysts agree that the move will help Verizon draw some customers to its higher-ranked network from AT&T. as Forbes colleague Eric Savitz wrote this morning, UBS analyst John Hodulik expects Verizon to sell 13 million iPhones this year, while Barclays’ James Ratcliffe has a more tempered forecast of 9 million.
Don’t be so quick to declare Verizon a big winner in all this though. for one thing, the subsidies necessary to keep the iPhone priced at a level consumer can stomach – Verizon will sell the 32 GB iPhone 4 for $299.99 with a two-year contract – mean wireless providers need to pay hefty subsidies, usually estimated at between $350 and $400 per phone.
That will likely cost Verizon somewhere north of $3 billion in 2011, and the better margins realized on the pricey data plans associated with the smartphone won’t offset the outlay for some time. In the latest issue of Forbes, I point out that Verizon has outperformed AT&T since the latter started selling the iPhone in 2007. (See “Curse of The iPhone? Verizon Bites The Apple.”)
Raymond James analyst Frank Louthan warned not to overlook the fact that it will not only be AT&T defectors buying the iPhone, it will also be existing customers switching to the phone and handing Verizon a bill (for the subsidy).
Verizon has scored with popular smartphones running Google’s Android operating system, but the quality of its network also bears watching as the wireless provider adds data-heavy iPhone users. Louthan points out in a Jan. 10 note that “customers should be careful what they wish for as network traffic spikes can harm any carrier.” (See “The big Questions about Verizon’s iPhone.”)
From Louthan’s note:
Over the long term, getting the iPhone is not a bad thing for Verizon. However, with near-term dilution to earnings not yet fully priced into the stock and the unknown of the network impact, we are not convinced it is a winner for equity investors. on the other hand, AT&T will likely see some customer erosion, offset by less subsidy to Apple and marginally improved network quality (real or perceived). This could improve estimates for AT&T. Both of these scenarios are well understood by most investors, but we find that until the numbers actually change … this does not get fully priced into the stock. as such, we believe this is a mixed bag of blessings for both carriers. with AT&T trading at a discount to Verizon, we believe investors will look to be more weighted blue than red as we kick off the year.
Verizon shares fell 85 cents, or 2.4%, to $35.07 Tuesday after the iPhone announcement. AT&T was down 49 cents, or 1.7%, to $27.85.
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