The Verizon iPhone: win-win for Big Red and Apple

The Verizon iPhone commotion did not actually start with the iPhone launch in June 2007, but rather when Apple's finest was just a twinkle in Steve Jobs's eye, and he was shopping the iffy idea to first Cingular and then Verizon. We've had numerous rumors over the course of these 3.5 years, which we are sure you are intimately acquainted with.

In 2010, however, the media chorus really revved up the pace. We ran the Verizon iPhone phrase in Google News Timeline from 2007-2011, and saw that the amount of news about it reached two notable peaks – one in June, and one in October 2010, for some reason, as illustrated below.



The June spike is easier to explain, because that's when the iPhone 4 was introduced, and people were hoping it will have a CDMA radio inside as well, so there were comments galore. But why the sudden spike in Verizon iPhone rumors in October then, right after the Q3 results were announced? And what happened with Big Red's CEO saying they have to "earn" the iPhone, he "can't speak for Apple", and hoping that Verizon's 4G rollout will bring the carrier a step closer to that goal as recently as September?

The third quarter of 2010

The reason might be that both Verizon and Apple got uneasy after the third quarter of last year, and for different reasons. For Verizon it was the sheer amount of high-paying customers AT&T added in Q3 - 2.6 million people, compared to the 997 000 of Verizon. The difference in subscriber numbers then shrunk to less than half a percentage point - 92.8 million for AT&T, against 93.2 for Verizon. We wouldn't be surprised at all if in the last quarter of 2010 AT&T actually surpassed Verizon to become the biggest US carrier - after all, it needed just half a million subscribers more to achieve that.

Considering that it sold 2.5 times more iPhones than Verizon Android smartphones in Q3, AT&T could very well be the biggest US carrier as we speak. Verizon has the lowest monthly cost per customer among US carriers - $26.88 per head in Q3, so we would not be too worried about the subscribers' number per se, but for the actual revenue.
 
Average monthly revenue per user was much lower for Verizon in Q3 than what AT&T’s customers spent - $51.99, compared to AT&T's $62.84. We should know who came ahead pretty soon, as the carriers are to report Q4 results at the end of January. In the meantime, take a look at these self-explanatory charts below, which visualize the carnage inflicted on Verizon's smartphone sales in August, when iPhone 4 really took the reign at AT&T.





Since he archrival AT&T is earning more per subscriber thanks to the iPhone, this really showed in Q3, when AT&T finished with the astounding 36.85% net profitmargin (these are Goldman Sachs-type numbers), against Verizon's still decent, but way lower 11.3%, according to Google Finance.

The little story above explains why Verizon had all the incentive in the world to iron out any control differences it might have had with Apple before, and swallow the $400 subsidy it must pay Cupertino for each Verizon iPhone. That's no small change - analysts are predicting8-12 million Big Red iPhone subscribers this year, which amounts to 3.2 billion minimum cash outlay from Big Red to Apple. AT&T is recuperating the iPhone subsidies for six months into a contract on average, way shorter than with other phones, because iPhone users spend more data, and Verizon is hoping for the same.

For Steve Jobs, on the other hand, a CDMA iPhone costs about 10-15% more to make just in terms of parts, not to mention the redesign expenses. We also have to add eventual penalty fees for breaking up the contractual exclusivity with AT&T, but we don't know when the contract was actually a done deal. If it was signed at the 2006 meetings, we are sure that Apple's lawyers, of which there are plenty, could have found some wiggle room that it is due to expire right now. Alternatively, the penalty fee tab could have been split with Verizon, since rumor has it that Big Red also paid Apple extra to keep the iPhone away from Sprint and T-Mobile.

Most likely Apple just ran the numbers what it will gain and lose for breaking up the exclusivity clause earlier than planned, and the pros outweighed the cons by a large margin, especially in line with Android's rapid growth last summer. To put Steve Jobs's irritation with Android in perspective - he was so annoyed by Google's decision to enter the smartphone business, that after ousting Eric Schmidt from Apple's board of directors in 2009, in September 2010 he literally snapped at Google's Android subscribers claims, adding also that Android is not as open as it paints itself to be, and is very fragmented.

"Well, we didn't go into search", said Steve Jobs childishly in an interview, when asked how he feels about Google entering the smartphone game. Just watching the little green robot march past iOS recently, and gain market share at neck-braking paces on all carriers, while the iPhone 4 was locked down tightly to AT&T, must have been a reason enough to sit down with Verizon and talk about speeding up this iPhone business of theirs.

Memory lane

Let's introduce some historical perspective, just to see how we got here. Steve Jobs about the conception of the iPhone in an interview: "I'll tell you. Actually, it started on a tablet first. I had this idea about having a glass display, a multi-touch display you could type on. I asked our people about it. And six months later they came back with this amazing display. And I gave it to one of our really brilliant UI guys. He then got inertial scrolling working and some other things, and I thought, 'my god, we can build a phone with this' and we put the tablet aside, and we went to work on the phone."

Steve Jobs, who was just coming out of a disappointing mobile relationship with Motorola, resulting in the ho-hum ROKR line, immediately saw the chance to get vindicated by applying this amazing technology in a touchscreen-only phone, which will be unlike anything anybody had seen so far. A carrier realationship would be necessary for these plans, and he met with Cingular (now AT&T) in February 2005 to sell the idea. There was not even a product yet, just the idea, and Cingular didn't promise anything, but remained interested.

Apple's intention to buy services from the carrier like an MVNO, and resell them together with the iPhone, was, of course, shot down. For 2.5 years after the meeting Apple worked day and night (not even counting the year before when it worked on the tablet concept), so it can announce its own phone. Subsequently AT&T promised to back up the project and agree on Apple's novel branding terms, if it receives 5 years of exclusivity.

Steve Jobs reportedly pitched the idea to Verizon as well at the end of 2005, or beginning of 2006, but Big Red reportedly turned down Apple's advances after hearing about the iPhone concept, considering the terms rather looney, and backed up only with the Steve Jobs charisma. Fast forward to now, and Verizon's head offices must have seen a lot of grown men cry in the last three years, when Apple became the most profitable cell phone company in the world, and AT&T was piggybacking on all that glory by almost reaching Verizon's subscriber numbers, and making quite a chink of money in the process.

The Verizon iPhone is here



Well, this is all behind Verizon now. AT&T is poised to slow subscriber growth in 2011, analysts are predicting anything from adding just 1.2 million new contracts, to losing 3 million when its iPhone exclusivity ends. We think that people who were holding off for a Verizon iPhone, didn't sign with AT&T anyway when the rumors started circulating. Besides, the carrier did a good job locking up people in two-year contracts by allowing early upgrades and slashing the price of older iPhone model.

Moreover, AT&T introduced a trio of amazing Android smartphones for this year, so the Verizon iPhone effect might be felt until the summer, when the next iPhone version arrives, and those Android powerhouses have been on sale for a few months already. On the bright side, current AT&T subscribers will probably benefit from having a less congested network. Verizon's 3G network might be slower than AT&T, but the claims are for better and more stable coverage. Besides, if you only have Verizon coverage where you live or travel, it's unlikely that you signed up with AT&T just for the iPhone.

We'll know how the sales numbers pan out in just a quarter, but in the meantime we can all finally put the longest-lasting rumor in the cell phone industry to sleep.

source: GoogleTimeline, Asymco, BusinessWeek