Apple (NASDAQ:AAPL) has a big decision to make: whether or not to extend its exclusive relationship with AT&T (NYSE:T) for U.S. distribution of the iPhone. (The current deal reportedly expires sometime in 2010.) Verizon (NYSE:VZ) would certainly like to get its hand on the iPhone (and so would Sprint (NYSE:S) and T-Mobile, for that matter). The question: is Apple willing to take a hit on margins to dramatically increase unit sales?
Bernstein Research analysts Craig Moffett and Toni Sacconaghi jointly took a look at the issue in a research note Monday morning. They contend that adding Verizon could allow Apple to boost sales by at least 100% in units, but that it would likely result in a cut in revenue per phone of $100 to $200.
The analysts note that for AT&T, the iPhone provides both a customer acquisition tool and a customer retention tool. A non-exclusive deal, they say, would reduce the value of the phone to AT&T and likely result in a reduction in the subsidy per phone from an estimated $450 to around $250-$350. They add that the fact that Verizon operates on the CDMA standard is not a major technical barrier, and that the issue will become less relevant in the years ahead as VZ migrates to LTE.
Adding Verizon, they explain, could significantly increase the addressable market. It has more subs than AT&T does, for one thing. And Verizon’s customers are largely untapped, while more than 10% of AT&T’s post-paid subs already are using an iPhone at this point.
Eventually, the Bernstein analysts believe, Apple will abandon the exclusive relationship with AT&T to maximize the addressable market. But in the near-term, they say, it will depend on what subsidy it can negotiate from the carriers. They contend that there are still levers AT&T and Apple can pull to boost market share without going non-exclusive. One possibility, they write, would be for Apple to add a lower-end phone. They says AT&T also could drive higher adoption with hardware discounts or reduce pricing on service plans. A third option, they write, would be to launch a device that could skirt the exclusivity provision, perhaps the much-rumored, but-not-announced tablet device.
Apple Monday is up $3.58, or 2.6%, to $139.39.