Verizon May Sell 12 Million IPhones After AT&T Exclusive Ends
Verizon Wireless may sell as many as 12 million iPhones next year after the largest U.S. mobile-phone carrier begins offering the device, widening its lead over AT&T Inc., analysts say.
Verizon Wireless will start selling Apple Inc.’s iPhone to customers in January, two people familiar with the plans said yesterday. AT&T has had exclusive claim on the device in the U.S. since it was introduced in 2007.
Verizon Wireless will likely sell about 12 million iPhones in the first year, UBS AG analyst John Hodulik said in an interview. Three to four million of those may be to customers the company draws from other wireless carriers, he said.
“Not only would they sell lots to their own base, but they would also be able to attract new gross adds from other carriers,” said Hodulik, who is based in New York and doesn’t own the shares, which he rates “neutral.”
Yair Reiner, an analyst at Oppenheimer & Co. in New York, said a deal with Verizon Wireless would allow Apple to sell at least 12 million additional phones a year. That would increase Apple’s annual revenue by more than $7 billion and earnings by more than $3 a share, Reiner said in a research note. Charlie Wolf, an analyst with Needham & Co. in New York, said Verizon Wireless may sell between 8 million and 9 million iPhones a year. Analysts at Barclays Capital said in a research note the company will probably activate 9 million iPhones in 2011, including 900,000 for customers new to Verizon.
Verizon Wireless had 92.8 million subscribers at the end of the first quarter, after adding 1.6 million during the period. AT&T, the second-largest wireless carrier, had 87 million subscribers, after adding 1.9 million during the first quarter.
AT&T made several concessions when it won exclusive rights to the iPhone three years ago. It started off sharing wireless service revenue with Apple, according to statements from Chief Executive Officer Randall Stephenson at the time, though it discontinued that practice in 2008. AT&T allowed Apple to manage the iTunes software loaded on the phone, a step that gave rise to Apple’s App Store for mobile applications. And AT&T subsidizes the iPhone, paying Apple an estimated $600 for each phone it sells to wireless customers for $199, Hodulik said.
Verizon Wireless may see profit margins trimmed as it begins to subsidize the iPhone, Hodulik said. Though he doesn’t know what Verizon will pay for the device, the subsidies may trim 10 percent off of earnings per share next year if payments are similar to AT&T’s, he said.
“It will add value for shareholders as well, but they’ll have to wait,” said Hodulik. The two people familiar with the iPhone plans wouldn’t provide the terms of the deal.
Verizon Wireless, which is building a high-speed fourth- generation network, plans to unveil several devices that will run on the new technology in January at the Consumer Electronics Show, CEO Lowell McAdam has said.
AT&T fell 27 cents to $24.19 in New York Stock Exchange composite trading at 4:01 p.m. Verizon Communications Inc., which co-owns the wireless company with Vodafone Group Plc, declined 60 cents to $28.02. Apple, based in Cupertino, California, dropped $4.64 to $251.53 on the Nasdaq Stock Market.
The iPhone has helped AT&T add subscribers even as the U.S. mobile-phone market nears saturation. There are enough wireless devices for more than nine out of 10 people, according to the CTIA wireless industry association.
In the first three months of this year, about a third of AT&T’s iPhone activations came from customers who were new to the carrier. Without those 900,000 new subscribers, the company may have posted a loss in contract customers that quarter, analysts said.
Still, Dallas-based AT&T has battled customer complaints about dropped calls and other service quality issues, especially in New York and San Francisco. The company dedicated an extra $2 billion to upgrading its network this year.
“It’s hard to ignore the quality issues that AT&T has faced,” said Hodulik. “The fact is, Apple is going to dramatically increase the number of devices it sells in the U.S. when exclusivity at AT&T ends.”
AT&T’s profitability will likely get a boost, with a lower subsidy cost that will add 4 cents a share to earnings in 2011, said Barclays analyst James Ratcliffe.
For Apple, a partnership with Basking Ridge, New Jersey- based Verizon Wireless is a victory over rivals such as Research In Motion Ltd. and Motorola Inc., whose smartphones are currently promoted by the carrier.
“For Apple it means a larger addressable market,” said Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Oregon. “It’s also good news for Apple in that it will spread the load on the wireless data networks, which will be good for their customers.”
RIM, maker of the BlackBerry, lost 49 cents to $49.26 on the Nasdaq. Motorola, which makes Droid phones that use Google Inc.’s Android operating system, decreased 28 cents to $6.52 on the New York Stock Exchange. Google fell $9.31 to $444.95 on the Nasdaq.
Apple has sold more than 50 million iPhones since the phone’s introduction in 2007. The latest version, iPhone 4, sold more than 1.7 million units in the first three days after its June 24 debut, a record for the product. CEO Steve Jobs said the company didn’t have enough supply to meet demand. Many stores, including retailer Best Buy Co., sold out.
A release at Verizon in the first quarter will help Apple’s sales in the U.S. grow to at least 15 million units next year from 11 million in 2010, Barclays said. The company’s suppliers have been ramping up production of components for a phone that will run on Verizon’s CDMA network, according to the research report.