Alright we now all know that Verizon has its hands on an iPhone and that it will begin taking first orders on February 3rd and that it will be a great and wonderful thing for a) Apple b) Verizon and a very, very bad thing for c) AT&T and d) rival handsets suppliers traditionally strong at Verizon like Motorola, HTC and RIM. Right? Well we’re not so sure.
Let’s talk about each constituency one at a time, starting with those people who were soooo in love with the iPhone that they jumped shipped and left either Verizon or another US cellco, and went to AT&T. This number is just over 4 million in the last four quarters and probably closer to 3 million in the previous four quarters.
Now we all hear that the AT&T network sucks, has performance and support issues and that the Verizon network is wonderful. But that won’t be the experience of all of its customers or they would have all gone by now, iPhone or not. And in some parts of the US, as there is in any network, there will be patches where the Verizon network is cursed by its customers. So not all 3 million of those customers are going to run back to their old network or to Verizon when their two year contract is up, let’s say that perhaps 40% will want to switch but only perhaps half of these have actually come from Verizon in the first place. And the 4 million who signed this year have two year contracts to run. Maybe people that have left Sprint and T-Mobile and others, will want to leave AT&T, and be happy to go to Verizon. So at 40% of those, that’s a set of customers, perhaps 1.2 million over a year, who might choose to experience the same phone, and a better network, which about half of them are used to. That might make a difference of 300,000 per quarter, and that’s a number small enough to lose in the quarterly figures.
Another, more important, constituency, are those people who wanted an iPhone, but who have remained loyal to Verizon as their carrier. It’s hard to put a number on this, which is why people are assuming that it’s the same number who have bought iPhones at AT&T. But the phones they will have taken are other smart phones, supplied for the most part by RIM, Samsung, Motorola and HTC and, oh yeah, Palm. And with the exception of Palm, and perhaps RIM, they all have hot devices which are now the equivalent of the iPhone.
And remember it is only those who bought their phones 12 to 24 months ago that will come up this year. Simple Cognitive Dissonance, whereby people are generally happy with the decisions they make, simply because they made them, will account for many of these. They’ve got by without an iPhone, and they like the brands they’ve bought. However many of these phones will be things like the HTC Touch Pro2, and the Samsung Rogue or the Nokia 7705 Twist ‘ not fully smart phones, but people coming off contract with those will be likely to take a smart phone this time around. Later in the cycle it would be devices like the
Droid range in particular, from Motorola and HTC, and these are the devices that the iPhone has to unseat, and frankly we can’t see why anyone would feel the need to move. So this year there might be quite a lot of movement, next there will be far less. Some will move simply for a change of scenery, but so will some AT&T iPhone lovers, move to Verizon with a Droid of some description.
And we have to remember that most of those owners took their devices before many app stores had really gathered momentum, except the Apple App Store, so they will have slowly come to be used to the Android Market store and think of it as the only place to go.
Our conclusion is that the iPhone will sell on Verizon Wireless, at high numbers for perhaps a year, but not to the specific detriment of a single supplier. The expansion in those people that are taking Smartphones could see that all the smart phone suppliers continue to do okay at Verizon.
There are of course another set of constituents, those people at AT&T who were planning to get an iPhone this time. Will they be offered the same device with the same gusto. So far AT&T has not gone to HTC or Motorola for their latest offerings, though it has gone to Samsung and RIM. Why would AT&T continue to spurn these devices, which are sitting over at its fiercest rivals, alongside the iPhone. It looks like Verizon just has more good phones, and the result of that would be for AT&T to lose more and more customers to Verizon. No, AT&T must level out the lines, and so it must start to carry an Android phone from Motorola and more up-scale HTC devices like a W-CDMA version of the Droid Incredible.
And given that Apple has hung AT&T out to dry, leaving it with a deal where some data revenue comes back to Apple, but agreeing what is likely to be a less generous deal at Verizon, AT&T will no longer have such a love affair with Apple, so why wouldn’t it try to take some even newer phones and push them ahead of the iPhone, and get exclusives which Verizon doesn’t have once again. The only place they are going to come from are HTC, Motorola and Samsung.
What is NOT going to happen is what a number of investors sites have been saying, that because the iPhone is new to an operator the same size as AT&T, that iPhone sales will double, and go to between 12 and 14 million on Verizon in the first year. We are talking about a Johnny-come-lately deal, after three years of the other side having this as an exclusive. In no part of the world did one other similar sized cellco take on the iPhone and sales doubled. What HAS happened is that three rivals have broken an exclusive and with four players (three new plus the original) selling the device, sales have doubled. But even then that was at a time when there were no other App Stores with very much software on them. So that’s no longer going to happen, not now.
Certainly if it did happen, it would be curtains for Motorola and for HTC at Verizon, but it won’t, because it would mean suddenly Apple overtakes Android phones again, and the graphs (android uptake versus Apple’s) are too steep to make such a change that suddenly, for a design that has had only a weak re-design in the past year.
When looking at this entire process from a Faultline points of view, we have to see what kind of influence all of this will have on Tablet sales, and especially Tablet sales which will show video and may eventually become sister products with a pay TV service.
We also know from comments made by Verizon executives this week, that the iPad will be sold by Verizon at some point in time and that it will feature a 3G (EV-DO) chip and a contract. Yes that’s very interesting and the iPad has momentum, but nowhere near as much momentum as the iPhone has. It took almost three years for rival suppliers to shape up to the iPhone standard ‘ it has taken under one year for hundreds of Tablet products to come out, many of them every bit as good as the iPad, so it has nowhere near the head of steam the iPhone has built up.
And while everyone will write iPhone video applications which show off the best of TV programming sent over the internet, it is rare that a TV service will send the full TV channels in this way. What Verizon promises to do is create a security bridge between its FiOS TV service set tops, which then feed TV channels directly to Tablets. All they will need is a piece of hardware to resolve the DTCP-IP encryption defined by the DLNA. Now we don’t think that Apple will provide a specialized version of its device for Verizon ahead of AT&T. But we think that Motorola, the set top maker which has business with both of the two pay TV services, will do this with a variant of its Xoom Tablet. Even Cisco might do it before Apple does.
One feature of the iPhone deal with Verizon that has been commented upon widely is the fact that it will be able to create a mobile WiFi hotspot. The device can then act as a companion product to the iPad, in much the same way as a 3G Blackberry can backhaul the new RIM Playbook tablet.
It’s a nice touch and stories are now abounding that AT&T will mirror this development (we doubt it) so that its iPhone can backhaul other WiFi only iPads. The reason we doubt it is that AT&T has had nothing but trouble constantly upgrading its cellular network to support the extra data traffic it inherited from the iPhone, so why should it push hard to support a device that it will rapidly lose its exclusive on, the iPad. Verizon wants to do it so that it can ramp its data traffic as fast as possible, reaping some revenue benefit from the fact that its network is considered more robust than AT&T’s. Verizon had openly talked about backhauling the iPad on its network over the past few months, with just about any smart phone it carries.
And if the iPhone can act as a MiFi device and backhaul signal for an iPad, it can do the same thing for pretty much any other Tablet, so it has no preference over which Tablet its customers buy. And anyway, who is going to watch video over a WiFi signal backhauled on an all you can eat cellular package which on both Verizon and AT&T tops out at 2GB (let’s say four hours of video) for $20 to $25 a month. You’d wait for a real WiFi signal to watch TV
The other thing that is going against the success of the iPhone 4 on the Verizon network, is that it is only going to be available at first on the 3G network, not on the new LTE nodes. There may be a gap of around a year before there is an LTE iPhone. And given that Verizon is pushing its LTE network, and that Motorola, Samsung and HTC are all going to have LTE devices before then, it is these that will get pushed by Verizon.
To us this entire deal is about being able to say that AT&T cannot steal our customers anymore and the first thing we’d put in place is a ‘Come home to Verizon,’ CRM program, aimed at converting iPhone deserters back to the fold. Sure they will be tempted with iPhones, but also the entire broad smart phone repertoire of Verizon and its multi-tablet signings.
Also whenever a customer says ‘I want to leave the Verizon network’ the nice man they make you talk to, before you can sign off, will have so much more ammunition to unhook the sale. ‘You want an iPhone, we got an iPhone,’ will turn back many on the brink of departure.
So for those reasons, the similarity of the iPhone design compared to existing Verizon devices, the lack of LTE, the likely responses by AT&T to the loss of the exclusive and the fact that we have all moved on three or four years and expect more, will mean that all the assumed losers in this deal, may not indeed lose very much. We assume that investors agree, given that Motorola has already made back many of the losses it made when the deal was announced.
Certainly we assume that there is no data contribution being made to Apple in the new Verizon deal (we could be wrong) because its promise to subsidize the phones to the tune of $350 to $400 is bad enough, and that might mean that Apple margins on the Verizon phones (and from now on, on the AT&T sales too) will be lower than the device’s original margins. So even Apple here, in some small way might be end up as a marginal loser in this deal. But even if its margins fall slightly, its volumes will certainly rise enough to compensate it and it will be less of a hostage to a single operator’s policy.