Was Verizon Really Wrong To Pass On The iPhone?

The Stalwart submits: There's a meme going around that because Verizon (VZ) turned down Apple (AAPL) when it came to it with the iPhone that the company is obviously stupid, or at least the guy who made that decision is. Why is he/they stupid? Duh, because the iPhone is selling like mad, breaking all kinds of records, making AT&T (T) a fortune.

Oh wait, about that last part, has anyone confirmed that AT&T is making a mint on this deal? We know Apple is going to make out pretty well, but AT&T?

I'm not sure the answer is as obvious as people think it is.

Let's first talk about how many subscribers the iPhone is likely to net AT&T. The most optimistic forecast I've seen is that the company will sell 8 million of them in 2008. Based on the most recent data I could find, that would be somewhere between 3-4% of the market. Of course, AT&T already has over 25% market share, so many of these customers will be their own, bringing the market share gain somewhere closer to 2%.

There's another problem, which is that Apple is getting some sort of payment from AT&T, either in the form of a revenue share or a bounty of sorts. This further reduces the value of these captured customers. As for AT&T's existing users that it turns into iPhone customers, it's conceivable that it'll see an ARPU drop, no?

There's also the problem of image and public perception. Anytime someone has a problem with the iPhone, the default will be to blame AT&T. In fact, there's already the viewpoint that AT&T's presence in the whole affair actually brings down the value of the iPhone. There are plenty of people that want the device unshackled from Apple's chosen carrier.

Ultimately you have to ask how much money can there be in it for AT&T if there's a sense that it brings absolutely no value to the table. All the value comes from Apple and its designers, which means that (almost) all of the profit is going to go to Apple. It's safe to assume that AT&T won this deal, because it was the quickest to genuflect in front of the iGod.

So yeah, Verizon is stupid for passing on the iPhone, obviously.

Comments

[Julian Ivan...:]

Verizon is/will lose millions of high paying, high ARPU customers to AT&T. About half of AT&Ts iPhone buyers are new to the network, and about 50% of those are ex-Verizon.
In addition, AT&T aren't subsidising the phone, so whatever revenue sharing they are giving Apple is counterbalanced by being able to profit on the handset itself.

So to answer your question bluntly and simply - yes Verizon was stupid-wrong to pass on the iPhone.

2007 Jul 09 08:52 AM

[Massive Love:]

Bingo. The Stalwart's analysis is sophomoric, apparently fueled by a bitter hatred for Steve Jobs, if one goes by the penultimate paragraph. AT&T will make lots of money, but more importantly, they're gaining locked-in customers and a reputation for enabling ultimate cool.

Verizon was extremely stupid and wrong to pass on the iPhone. Dislike of AT&T is partly blunted by the fact that people aren't significantly happier with Verizon, although AT&T has been significantly more evil in absolute terms (the let's-help-Darth-Cheny... thing).

In terms of customer love, wireless plan providers are the new cable companies. This problem won't go away until all phones are unlockable and wireless providers are forced to compete based on service.

2007 Jul 09 11:16 AM

[the teller:]

The iPhone is pretty much a dead brick without connection. Therein lies AT&T's value.

Luke

2007 Jul 09 09:07 AM

[Tom B:]

"The iPhone is pretty much a dead brick without connection."

Not quite a dead brick; an extra-pricey iPod. Which makes it still more valuable than any OTHER cell phone without a connection.

No-- I amend that. You still could receive Wifi. Thus; you'd have an iPod that surfs.

Much better than fired masonry.

2007 Jul 09 09:22 AM

[Play:]

The one thing that many of these "analyses" fail to address is that all of the ATT iPhone customers are paying in full for their connection; there is no cell phone rebate that ATT must write off. Assuming the typical "rebate" is $150, and the wholesale value is only $75. That is a lot of additional revenue that ATT gets from each customer.

2007 Jul 09 01:31 PM

[peter02l:]

"The most optimistic forecast I've seen is that the company will sell 8 million of them in 2008."

It is obvious you haven't been reading much lately, if at all:

Piper Jaffrey's Gene Munster forecasts 12.4 million for 2008 (and 45 million for 2009);

Goldman Sachs' David Bailey raised his forecast to 12 million for 2008 (from 10.5 million);

Shebly Seyrafi's (Caris & Company) numbers are 17 million for fiscal 2008 (ending Sept. '08, which does not even take in to account the last three months of the year)

Just to let you know there are more optimistic forecasts from well-known sources than the ones you have seen. In fact, your number is the lowest I have seen. Please tell be the source, as perhaps other sources who came up with numbers lower even than you maximum.

Thank you.

P.S. To suggest that AT&T "brings absolutely no value to the table" is not factual at all. No phone can function without a carrier. If you know of such a phone please enlighten us. We are existing AT&T customers, and as a result of the iPhone our bill will double on account of four new data plans. Unfortunately I got a hand me down, but others are quite happy with their phones.

2007 Jul 09 03:51 PM

[Alan Williams:]

Yes, your iPhone sales forecasts were made by Apple's competition. They are way too low.

Let's not forget that the 10 to 20 million iPhone customers that AT&T will have by the end of 2008 will all be paying AT&T $20 per month for their, up to now, underutilized 2.5G data network.

At 20 million iPhone customers, that's 4.8 billion a year in revenue in 2009 that they wouldn't have had without the iPhone.

Verizon, a bigger control freak than even Apple is, could not agree to relinquish cell phone feature control, could not see the iPhone's potential, and screwed up big time. You'd think no one in upper management at Verizon had ever used an iPod or a Mac with OS X.

Big mistake. When they do the postmortem on Verizon's corpse, the iPhone will be mentioned by one and all.

2007 Jul 09 04:38 PM

[jbelkin:]

Verizon's bigger problem is CDMA.

2007 Jul 09 05:10 PM

[uncleralph:]

Verizon LOSES.... You make the point that AT&T may not be the big winner here - but for every Verizon customer that buys an iPhone - Verizon LOSES. That mean that for every customer to move to AT&T - Verizon LOSES over $1,000.00 a year. This is not a net neutral for Verison - THIS IS LOST REVENUE -

So, does Verizon lose in the iPhone deal? yes.

2007 Jul 10 09:31 AM

[Neil Anderson:]

Maybe Verizon shouldn't have been so quick to hang up on Apple.

2007 Jul 10 11:41 PM

[Daniel Carr...:]

While the Stalwart is worthy of being Daring Fireball's Jackass of the Week for being factually wrong on so many counts... saying "T is smart, VZ is stupid" is a major oversimplification.

If T were in VZ's situation-best network/reputation (+ best retention rate, IIRC), I'm sure they would have shot Apple down too. But instead, they were in a weak position-middle of a rebranding effort, spotty network-so they gave Jobs what he wanted.

If VZ had taken the iPhone on Jobs's terms, the phone itself surely would have been a success, but VZ might have shot itself in the foot by setting a precedent that a phone manufacturer gets a cut of monthly revenue (T could feel the same backlash). It's an exciting time to watch the wireless industry.

2007 Jul 11 01:11 AM