iPhone 3G Fallout: Good for Towers, Bad for Palm

There’s plenty to chew on today following Apple (AAPL) chief executive Steve Jobs’s unveiling of the next iPhone in San Francisco yesterday. Eric’s already talked a bunch this morning about the implications for Apple. Herewith, a smattering of discussion as to what it means for the rest of the communications industry.

The big picture is offered by Goldman Sachs analysts Simona Jankowski and Thomas Lee, who opine that there will be 15% compounded annual growth in revenue in smartphones over the next 5 years as a result of “more affordable smartphone devices and focus by handset vendors following iPhone.” That will result in increased email, Web and other data uses, leading to a ballooning of telecom services revenue, from $19 billion last year to $70 billion in 2012, they write.

Palm
You would expect the immediate target of a cheap $199 iPhone3G would be venerable hand-held organizer maker and smartphone pioneer Palm (PALM), which is already struggling to get back to profitability on its Centro smartphone, which is the budget leader in the smartphone category. And indeed, today Palm shares are down 42 cents, or 6.19%, at $6.37.

Lawrence Harris with CL King & Associates reiterates his “Neutral” rating on Palm, writing that Palm “could faces challenges from the new iPhone on several fronts.” Among those fronts, “Apple has reduced the price differential between the iPhone and Palm.” Harris also notes that Palm is expected to unveil new versions of its Treo smartphone using Microsoft’s (MSFT) Windows Mobile 6.1 software, first with Sprint (S) in July, and Verizon later in the year. The Treo, he observes, currently sells way above the $199 price of the new iPhone, from $249 to $299.

Moreover, while the Centro is expected to be rolled out at Verizon Communications’ (VZ) Verizon Wireless, possibly as early as Friday, writes Harris, Palm is stuck waiting for a new operating system, based on Linux, which is not a great place to be while Apple has focused on opening the iPhone to third-party developers.

Harris thinks the software aspects of the iPhone are more important than the device itself. Harris makes reference as well to the 3G version of Research in Motion’s (RIMM) Blackberry, the Bold 9000, coming to AT&T, and later to Sprint, and two other Blackberry models in development, the Thunder 9500, which is expected to use a touch screen, and a clamshell-style device. And, to add to the pile, Nokia (NOK) is working on a variety of smartphones with touch screens, while the Samsung Instinct is due at Sprint on June 20. The pile-on is getting deep, in other words.

Research in Motion
Speaking of Blackberries, there seem to be many parties running to the defense of Research in Motion today despite Apple’s emphatic embrace of the Blackberry business market in Jobs’s pitch. The stock is up $1.26, or 1%, today, at $135.37. Richard Windsor with Nomura Securities, writing from London, observes in a note on Apple that “We do not think that this will affect RIM very much as Apple remains very far away from offering the level of enterprise functionality that Blackberry does.” Be that as it may, the $199 price “moves the i-Phone much closer to the mainstream and will raise competition for both Nokia and [Taiwanese smartphone maker] HTC in the smartphone market.” Research in Motion shares are slightly up today, +0.66% to $135.01.

Likewise, analyst Peter Misek with Canaccord Adams writes that Apple will be unable to match the Blackberry’s security, battery life, bandwidth efficiency, “backend IT support,” among other things. He thinks Apple will do very well selling 20 to 30 million iPhones next year, but that RiM may sell 50 million Blackberries. Misek also tosses in his personal experience, noting that he thinks download speeds for Web pages are faster on the Blackberry Bold (that’s the 3G device). Misek has a “Buy” rating on RiM and a price target of $200.

AT&T
Most seem to agree that subsidizing the iPhone will be a plus for AT&T (T) by boosting uptake of new subscribers. Just how much it may help is more complex to put together, given that AT&T has said the subsidy will dilute earnings, and AT&T shares today are sagging slightly, down 19 cents, or half a percent, at $37.37. Sanford Bernstein’s Craig Moffett says that as long as the $199 price creates demand elasticity, “AT&T wins.” “While we don’t know exactly how large that uplift will be, it is likely to be significant,” writes Moffett. “After all, we have a better device on a markedly better network for a markedly lower price.” Moffett offers an estimate of 5 million iPhone3Gs being sold between July 11 and Dec. 31 this year, or “2x the peak sales rate of the Edge iPhone.” Moffett’s one concern is that going backward from a full-price iPhone to a subsidized one takes AT&T — and the industry — back to the old, subsidized model, which he terms a “drug,” in that it pushes off the realization of a day when customers pay for their gadgets, relieving carriers of that expense. The implications of that, are “cloudier,” he writes.

On a more bullish note, Lehman Brothers analyst Thomas O. Seitz writes today that the subsidy of the iPhone by AT&T is “an attractive risk versus reward for AT&T,” given Apple’s cache, the extensive use of the high-speed HSDPA network it will induce, and “US telecom usage patterns.” Seitz estimates that the current revenue-sharing deal with Apple costs AT&T about $100 during the life of an iPhone customer (though I think he means the life of their contract!). Subsidizing the iPhone3G will cost AT&T $150, he figures, so, a 50% increase in cost. Seitz reduced his profit estimate for AT&T for 2008 and 2009 to $3.03 and $3.42, down from $3.12 and $3.53. That’s about in line with the 10-cent to 12-cent dilution that AT&T modeled in its discussion of the subsidy yesterday. The upside, says Seitz, is that the iPhone3G will help AT&T to “continue to deliver double digit long-term EPS growth.”

Nokia
Maynard Um, a wireless chip analyst with UBS Securities, writes that the iPhone announcement wasn’t as bad for Nokia as it could have been, given that the iPhone3G doesn’t differ much in shape and size from the current model, and Apple did not introduce lower-end models, which would have been a real threat to Nokia. However, Um says he came away “impressed” with Apple’s service for synchronizing iPhones with computers, called “MobileMe.” “It is clear,” writes Um, “that Apple will pose a challenge to existing vendors and provide competition to Nokia’s Ovi,” an online service for music and software offerings that Nokia has been developing.

Cell tower operators
Meantime, Brett Feldman with Lehman Brothers thinks the tower stocks, such as American Tower (AMT), SBA Communications (SBAC), and Crown Castle International (CCI), are cheap given the increased free cash flow they may get as they lease more tower capacity to meet a flood of data usage on the new iPhone. All three stocks are up today. “We believe we are still in the early innings of the investment cycle in wireless data capacity,” writes Feldman. “The iPhone3G — with its low cost, elegant design and flat rate data pricing — may drive the adoption of wireless broadband the same way that the Digital One Rate plan drove the adoption of wireless voice services in the 1990’s,” he adds.

Comments

[user 878974]

like how you analyzed the rest of the sector.

[N. Courtney]

I find it interesting that people actually think people are going to to leave their carrier to get an iPhone, most people are in one, two or three year contracts, and they're not going to pay an early termination fee to go buy 200.00 or 400.00 phone, except trendy yuppie types who want to impress people, and who are some of the same people who live above their means, and live to impress. Until the communication industry adopt an open model for taking a telephone, your phone number, and the applications on it to another carrier they're always going to be trying to come up with ways to get customers, why would someone buy a phone, and buy applications for that phone and carrier and then switch carriers and risk losing the investment they've put into that phone.

You can put all the bells and whistles on the iPhone or any other phone, and it's not going to make people switch AT&T subsidizing Apple was a bad idea, especially for consumers when most manufacturers are trying to get their product out to as many people as possible, Apple goes with this same business model as they did with the iPod exclusivity. Verizon is the number one wireless carrier for a reason, and they don't sale iPhones, but they did have smart business since to buy Alltel. AT&T got an exclusive deal to sale iPhones. Which one of the carriers will sign an retain more customers in the long run, and customer defections usually aren't good for the business or it's investors.

[Medici]

Palm up up and away......Verizon deal on $99 Centro will corner the low end of the market, for which the iPhone is not targeting. A billion dollar market cap is in the offing again for Palm-

[Esoteric1]

I think you VASTLY underestimate the appeal of the iPhone. I will be leaving my wireless company in July in order to get an iPhone and most of my colleagues will be doing the same.

Apple has addressed a lot of it's short comings with this new iPhone and with the upgraded speed of the 3G network combined with the overall power and features of the phone, the iPhone is now the standard against which all other smart phones will be compared.

Not to mention how sexy the thing is! I know I'm sounding like an Apple fanboy here, but the facts are undeniable. Sure you can put all the bells and whistles on another handset. LG has some pretty nice handsets as well. But nothing comes close to the iPhone's looks and operating system. The amount of 3rd party applications ALONE make it worth having.

[N. Courtney]

VASTLY under estimate the power of the iPhone, the same people who will buy an iPhone are the same people who bought the iPod a device that people said the same thing User 210048 has stated. 1. People who buy a communcations device for how sexy it looks are mre or less the same people who need to feel important are lacking self esteem, these people buy to show off, the iPhone sets the standard I'm an engineer, and the touch screen has been around for a while the reason they're not adapted in the first place is because of longevity, as I stated on a another board, take a good look at any touch screen display that's been in use over a year or two and scractches start to appear from the friction and repeated pressing in certain area of the screen.

The fact that Apple offers one phone in their portfolio, and was still selling an expensive feature rich phone only to come with one at a subsized price point reiturates the point of just how easily some people can be manipulated into buying anything. The iPod was suppose to be the standard that raised the bar for playing music and video, but people who bought the device soon found that you couldn't take music and video and transfer it to any other device of your choice, Apple controls all aspects of that device, I have a device that can do the same things except I can transfer my music and video where ever I choose, gee am I seeing a trend here, I can buy an iPhone only if I switch to the carrier Apple chose exclusively in the U.S..

One day I hope people wake up and realize that the subsidized phones are a bad deal, Oh but wait they have recent legislation that's being discussed by law makers to do something about high disconnect fee is in the process, but what the people who want this legislation don't realize is that the reason they're getting a sweet deal on the phone is that it's SUBSIDIZED by the U.S. carriers the carriers buy the phones for a much higher price than they sale them, hence to get their money back the customer is put into a 1, 2 or even three year contract agreements. Apple was selling a phone with a bunch of bells and whistles for an exorbitant price and people were still having to sign contract agreements, just as they are with the new iPhone that just came out a 2 year contract, that will probably be just about the that phone will start having problems, and when they come out with a new iPhone that people will upgrade to and be locked into another 2 year contract. I don't hear people singing the praises of the iPod like they once did when they first came out, and the same will happen with the iPhone. Me I just need a phone to make phone calls reliably. If i want sexy I'll find a woman, not a hand held device.

User 210048 is right facts are not deniable, if they make it, and sale it, their is a sucker or a lemming who will buy it. Pretty much the same way some people believe campaign promises. I get a trade magazine that cover the wireless industry and one of the writers said the same thing as User 210048, how Apple raised the bar, I just want to know what Apple is telling the customers who had bought the first and more expensive iPhone, only to come out with what User 210048 says techniacl issues which have been addresses, and come out with a supposedly superior flawless new phone for a much lower price. SUCKERS!