Verizon iPhone finally comes calling

Will Verizon match the big subsidies that AT&T pays Apple to carry the iPhone? We'll see.

By Jim J. Jubak Jan 10, 2011 6:25PM

Jim JubakVerizon Communications (VZ) and Apple (AAPL) will hold a press conference Tuesday to announce, everybody on Earth and the inner planets believes, that Verizon will start selling the iPhone in February.


The big question, though, is price. Will Verizon subsidize iPhone sales to the degree that AT&T (T) does now? If so, Verizon is looking at big sales this year but a substantial ding to earnings. 


If not, either Apple will see its huge margins on the iPhone -- estimated by some Wall Street analysts at 60% -- reduced, or Verizon will wind up selling the iPhone at a price that makes it much less competitive with phones based on Google's (GOOG) Android operating system.  


The answer to that question depends on which company, Apple or Verizon, turns out to have been most anxious.


Post continues after video:

Apple badly needs another selling outlet besides AT&T. That company's network has been slowed by the huge amount of bandwidth iPhone users consume, to the point that the slow speed of service has cut into iPhone sales. (And in some cities, the AT&T network has been inadequate, users like my New York City-based partner Bob say, from the beginning.) 


Add in price cuts from Android-based phone makers and Android-based phones that have closed the "coolness" gap with the iPhone, and it's really not surprising that Android-based phones grabbed 26% of the smart-phone market in November, according to ComScore MobiLens, to the iPhone's 25%. (Android's share is coming largely at the expense of Research In Motion's (RIMM) Blackberry, which saw its share drop to 33.5% in November from 37.6% in October.)


But Verizon needs the iPhone perhaps even more than Apple needs Verizon. Every month that AT&T is the sole outlet for the iPhone means another month when Verizon adds fewer customers than its big rival. In the third quarter, according to All Things Digital, Verizon had fewer than 3 million smart-phone activations, while iPhone activations exceeded 5 million. Verizon is spending billions to upgrade its network, and the company can't afford to fall behind AT&T in market share.


I think that Verizon was the more anxious of the two companies and that the deal that will be announced today (probably) will show Verizon matching the big subsidies that AT&T pays Apple in order to keep the iPhone priced at $200 to $250. That will require Verizon to pay Apple a subsidy of $300 to $500 a phone.


When AT&T did its initial iPhone deal in 2008, those subsidies cost the company 11 cents a share in earnings in the first year of the deal. I'd expect something similar at Verizon in 2011.


The exact amount of the cut to earnings will depend on what kind of iPhone Verizon announces. A CDMA-only phone that runs on the company's older network would have a potential market, consultant PRTM estimates, of 5 million to 7 million users. A dual CDMA/LTE phone that took advantage of the new LTE-standard network (which operates at ten times the speed of CDMA networks) that Verizon is now rolling out would have a potential market of 10 million to 12 million users.


But the likelihood is that with LTE chipsets in short supply and Verizon still rolling out the LTE network (national rollout isn't scheduled until 2013, Verizon says), the new Verizon iPhone will be CDMA-only.


That will have the effect of limiting Verizon's 2011 and 2012 upside potential and the near-term hit to earnings. And it should remind investors that this is a deal worth investing in only if you're patient enough to wait for the long-run rewards in 2013 and beyond.


At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own Apple shares as of the end of November. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 


More from MoneyShow.com:

1Comment
Jan 11, 2011 11:39AM
avatar
iPhone not compatible with outlook? WTF are these people talking about? Just goes to show that reporters are talking out of their asses most of the time. I've had an iPhone since the first one and I've always been connected to outlook. Here's an idea, when you have a tech announcement, why not go out and find someone who knows a little something about technology to be in on the conversation instead of these morons.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

122
122 rated 1
288
288 rated 2
472
472 rated 3
638
638 rated 4
628
628 rated 5
704
704 rated 6
609
609 rated 7
489
489 rated 8
275
275 rated 9
129
129 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
ITUBITAU UNIBANCO BANCO MULTIPLO S.A.10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.