Fans of Apple’s (AAPL: Charts, News, Offers) iPhone in America have long demanded that Apple start expanding its vaunted, game-changing handset to other carriers besides its lambasted exclusive carrier, AT&T (T: Charts, News, Offers), due to restrictive policies and widely criticized reception quality. There have long been floating rumors of a Verizon (VZ: Charts, News, Offers) iPhone, which have until now been vehemently denied by both Apple and Verizon. However, a recent Wall Street Journal report has claimed that a Verizon iPhone will be available starting in early 2011, ending AT&T’s lucrative exclusive deal with Apple, which has been in effect since the iPhone’s debut in 2007. This would inevitably give Apple, which is forecast to sell 40 million iPhones this year, a shot in the arm against Google’s (GOOG: Charts, News, Offers) Android army, which is backed by handset makers HTC, Samsung, Sony Ericsson (SNE: Charts, News, Offers), Motorola (MOT: Charts, News, Offers) and many others. In addition, a Verizon iPhone would be yet another devastating blow against Nokia (NOK: Charts, News, Offers), which has already been embroiled in legal battles with Apple as its proprietary mobile operating system’s market share has steadily eroded and lost favor with developers and consumers alike.
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While American consumers have often complained about Apple’s choice to stick with AT&T, Steve Jobs’ initial choice was made for two obvious reasons. Firstly, without any prior experience releasing handsets into a crowded market, the best choice was to piggyback off the largest mobile service provider to ensure a well-established customer base. Secondly, AT&T’s GSM network matches the most commonly used mobile network protocol worldwide, and Apple would only be required to create one phone model for various global markets. Since then, Apple’s iPhone has far outgrown its need for AT&T; rather than viewing AT&T as its asset backbone, it has become a liability, a ball and chain to loyal iPhone users seeking better deals from competitors, mainly Verizon Wireless, which runs on the lesser used CDMA (code division multiple access) networks, which is also used by Sprint (S: Charts, News, Offers) and T-Mobile.
The report claims that Verizon has been privately meeting with Apple, upgrading their current network capabilities in anticipation of high iPhone data traffic, which was a primary complaint against AT&T in densely populated urban areas such as New York and San Francisco. Consumer Reports has asserted that Verizon’s current CDMA network is superior to AT&T’s GSM. In addition, Verizon still offers unlimited data plans, while AT&T restricted users dramatically in an attempt to relieve network congestion. Apple desperately needs to increase its market share overnight in order to halt Android’s rapid advance. In August, the gap narrowed as Android smartphones numbered 10.9 million against 13.5 million iPhones. To put this in perspective, there were only a mere 866,000 Android users a year earlier, as opposed to iPhone’s 7.8 million, which strongly suggest that iPhone usage is beginning to mature and slow, whereas adoption of Android is still accelerating towards its full potential. A deal with Verizon, which owns 26.8% of the U.S. smartphone market, combined with AT&T’s 38%, would give Apple a prospective 64.8% iPhone customer base. Offering the once-exclusive iPhone on T-Mobile (14.8%) and Sprint (16.3%), which run on CDMA networks, would be next on Apple’s list of priorities. The CDMA model of the iPhone would be compatible with South Korea, Japan and Latin America’s CDMA networks. Currently, 36.4% of Verizon’s smartphones use Android, while 68.7% of AT&T smartphone users use the iPhone. It is estimated that Verizon could add over 10 million iPhone customers and could fuel faster smartphone adoption, which would also indirectly help its Android segment. In addition, Apple currently has a fifth-generation iPhone in the works, which will either turn the tide against Android or finally begin to suffer the fate of diminishing returns.
Verizon President Lowell McAdam said of Apple, “At some point our business interests are going to align. I fully expect it [the Verizon iPhone], but I don’t have anything to say.” Apple has also remained silent on the matter, despite continuous press leaks regarding the upcoming agreement. In the past, Verizon disagreed over Apple’s demand that Verizon disallow the iPhone to be sold by its retail partners, and that it keep Verizon’s paid proprietary music and video services off the iPhone, where it would come into direct conflict with iTunes. Apple had also considered creating a dual-network phone which would operate on both GSM and CDMA networks, but in the end decided on two separate phones, in order to preserve their traditionally large margins.
While most journalists believe that Apple’s Verizon iPhone will be a CDMA device, there are others who believe that Apple signed with Verizon in anticipation of its recently announced 4G LTE coverage plan. Verizon has claimed that it plans to start 4G LTE coverage for nearly 70% of the United States by the end of 2010. 4G LTE has a theoretically top speed of 100 Mbit/s downloads and 50 Mbit/s uploads, which rival current wired ADSL connections. As details are sketchy regarding the manufacturing of Verizon’s iPhone, Apple and Verizon could pull the rug out from under the competition by unveiling a 4G LTE iPhone, which would help it gain the upper hand against primary competitor AT&T.
John Donovan, AT&T’s Chief Technology Officer, has also refused to comment on the impending Verizon iPhone, but he touted the many strengths of his company’s GSM network, such as simultaneous web browsing and voice calls, which Verizon’s CDMA network does not allow. He also stressed that AT&T still offers a wide variety of smartphones, including a large selection of Android and Blackberry phones.
Verizon has been traditionally viewed as a dividend income stock rather than a growth stock. It currently pays a quarterly dividend of 0.49 per quarter, which at the current price is a hefty 5.8% yield. The stock has bounced between 25.99 and 34.13 with a forward P/E of 14.27. The PEG ratio of 2.29 would suggest that the stock is fairly valued, if not slightly over valued. However, the appearance of an iPhone in their lineup and the introduction of a 4G LTE network could change all that and kickstart the company’s growth once more.
Other News About VZ
AT&T Hits Back on Verizon LTE Claims – AT&T strikes back at Verizon – (VZ: Charts, News, Offers), (T: Charts, News, Offers)
Don’t Tease Me Now. Verizon iPhone is a Done Deal? – After countless rumors, is the Verizon iPhone finally a reality?
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BofA halts foreclosure sales in 50 states – (BAC: Charts, News, Offers)
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
