It's iPhone or Bust for Verizon

If Verizon's (NYSE: VZ  ) lukewarm first-quarter earnings make anything clear, it's that the company badly needs Apple's (Nasdaq: AAPL  ) iPhone to arrive on its store shelves by the end of this year. This isn't because AT&T (NYSE: T  ) is eating Verizon's lunch, but rather because Verizon's lunch is looking pretty unfulfilling in the face of a maturing U.S. wireless market.

Growth sources are tapped out
While Verizon's sales and earnings were pretty much in line with market estimates, its wireless subscriber growth was pretty disappointing. In particular, the company's base of retail subscribers paying monthly service fees grew by only 423,000, compared with about a million a year ago. Considering that AT&T only did a little better, adding 512,000 such subscribers during the quarter, and that Sprint (NYSE: S  ) and T-Mobile have long been laggards, you can't pin Verizon's problems on a weak competitive position. Instead, the company's biggest problem is an American wireless market that has grown to the point where there are very few subscribers left to sign up. Rather, most of the remaining growth involves less valuable customers such as prepaid users, who made up the largest chunk of Verizon's 1.5 million net wireless customer additions.

What's more, with fewer new subscribers left to pick up, Verizon and AT&T have decided to take their gloves off in battling for existing subscribers, as shown by the major price cuts each company announced earlier this year to its unlimited voice plans. Thanks in part to these price cuts, Verizon's retail wireless service revenues grew by only 5% annually -- this, in spite of retail data service revenues growing by 25.6%, owing to the popularity of smartphones such as Motorola's (NYSE: MOT  ) Droid and Research In Motion's (Nasdaq: RIMM  ) BlackBerry Curve 8530.

Meanwhile, with Verizon winding down the rollout of its FiOS fiber-to-the-home platform, FiOS net subscriber additions have gone into a nosedive that they're unlikely to pull out of. Net subscriber additions for FiOS' TV service totaled only 168,000 in the quarter, down from 299,000 in the year-ago period. And while decreased FiOS investments might be bringing down capital spending for Verizon's Wireline division, this decision also means that the company is depriving itself of a vital growth source needed to offset the rapid decline in the number of traditional local voice lines serviced by the company. This decline was the biggest reason why Verizon's Wireline revenues fell by 2.9% annually, and the entire company's revenues were up by only 1.2%.

Will the iPhone arrive?
It's in this context that the release of an iPhone that runs on Verizon's EV-DO 3G network becomes a big deal. Even by the standards of an old-school phone company rather than an up-and-coming tech company, Verizon's growth prospects are looking like they're on very shaky ground. But if Steve Jobs decides that the threat from Google's (Nasdaq: GOOG  ) Android operating system-- which Verizon has done as much as anyone to promote -- means the company should release an EV-DO iPhone and slow down Android's U.S. momentum while it still can, then Verizon is bound to get a massive boost from the horde of iPhone enthusiasts who will flock to it for its superior network coverage and reputation for reliable service.

On the other hand, if Jobs decides that he'd rather keep things simple, and doesn't want to work with Big Red until he can offer an iPhone based on the next-generation LTE standard (supported by AT&T and numerous international carriers, in addition to Verizon), then Verizon investors are probably in for a bumpy ride over the next year. Even if Verizon holds its own against its biggest competitor.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Sprint Nextel is a Motley Fool Inside Valuerecommendation, Google is a Rule Breakers pick, and Apple is a Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool is investors writing for investors.


Read/Post Comments (15) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 23, 2010, at 3:51 PM, conradsands wrote:

    This doesn't help ...

    Verizon & AT&T have attempted to confuse the marketplace by lowering their pricing to $69.99, but theirs are for calling only. In today’s economic environment customers are interested in more than just voice pricing. They also want the best value for all the other things they rely on their wireless phone for and Sprint delivers. Sprint's Everything Data plans start at $69.99 per month and include Any Mobile, Anytime for unlimited calling with any U.S. wireless user, plus unlimited text, picture and video messaging, e-mail, Web browsing, social networking and more.

  • Report this Comment On April 23, 2010, at 3:52 PM, conradsands wrote:

    From the New York Post …

    Verizon charged phone-y fees; suit

    By Chuck Bennett

    Read that bill carefully.

    Verizon Wireless cheated millions of customers with bogus data charges, lawyers allege in a growing class-action lawsuit.

    The cellphone-service provider has been tacking on $1.99 Internet usage fees even when customers' phones were turned off or when they accidentally launched the browser and didn't download a kilobyte of data, according to the suit in Newark federal court.

    Verizon Wireless even rigged phones to make it easy to accidentally launch the browser, said lawyer Peter Cambs, of the firm Parker Waichman Alonso.

    Verizon Wireless declined to comment.

  • Report this Comment On April 23, 2010, at 3:52 PM, conradsands wrote:

    Verizon and AT&T = The Most Expensive Wireless Calling Plans in America

    Wireless Profit Margins:

    Verizon Wireless = 45 percent

    AT&T = 39 percent

    Sprint = 18.2 percent

    Now we know where Verizon and AT&T get all that money to run commercials 24x7, pay out huge executive bonuses and hire armies of lawyers and lobbyists -- the American consumer.

  • Report this Comment On April 23, 2010, at 3:52 PM, conradsands wrote:

    4G wireless--which operates at speeds up to 10 times greater than today's 3G networks--could become a reality for many businesses and consumers over the coming year. Sprint, the current 4G leader, says it will introduce its first 4G smartphone before mid-year.

    Sprint’s fourth-generation phone -- the HTC EVO 4G -- will be available this summer and run Google's Android software.

    The phone also will be able to act as a mobile hotspot, allowing customers to connect up to eight Wi-Fi enabled devices. As a result, people could use the phone for their Internet connection for a laptop or desktop computer.

    Where 4G isn't available, the phone will use Sprint's 3G network. It will be available through all the usual Sprint channels and RadioShack, Best Buy and Wal-Mart.

  • Report this Comment On April 23, 2010, at 4:01 PM, gslusher wrote:

    OK, "conradsands," we get it that you're a shill for Sprint. Sprint should distance themselves from you immediately.

  • Report this Comment On April 23, 2010, at 4:05 PM, rlhoman wrote:

    I'm not sure I understand why Verizon would want to offer a phone whose profit all goes to the manufacturer, not them. They seem to be doing quite okay without it.

  • Report this Comment On April 23, 2010, at 4:16 PM, thoughtsimple wrote:

    This bit of misinformation keeps getting repeated, "Big Red until he can offer an iPhone based on the next-generation LTE standard (supported by AT&T and numerous international carriers, in addition to Verizon), then Verizon investors are probably in for a bumpy ride over the next year."

    The problem is that even when Verizon gets LTE data working in some markets, the fallback is still going to be CDMA/EVDO. Along with that the current LTE plans are only data not voice. The last I read, the voice protocol for LTE isn't even completed yet much less ready to go.

    What this means is that if Apple is unwilling to make a CMDA/EVDO phone then Verizon isn't going to get the iPhone even when they do migrate to LTE. It isn't a year away, it is more like 5-10 years away when Verizon switches to the GSM standard.

    Basically, the lack of an iPhone on Verizon is not a technological issue but an issue of control between Verizon and Apple. Apple could easily build a CDMA iPhone for Verizon's network. The business issues are much harder to resolve. But please stop spreading the myth that a Verizon LTE network solves the problem with an incompatible iPhone. It will not do any such thing for years.

  • Report this Comment On April 23, 2010, at 4:21 PM, hellomojo wrote:

    conradsands.. You said "Verizon & AT&T have attempted to confuse the marketplace by lowering their pricing to $69.99, but theirs are for calling only".. thats not true; its what Sprint told you. I pay $70 for my iphone plan and it includes calls, data, web browsing, email, all the apps I can stand, etc. Only thing it doesn't include is Texting..they do charge $5/mo more for that if you want it; which I agree does suck. One question on Sprint..they say their plan includes free calls to wireless users; how much do the charge you if you call someone thats not a wireless user? And do they have an App that tells you if the # you are calling is not a wireless user?

  • Report this Comment On April 23, 2010, at 7:16 PM, iphoneforwhoever wrote:

    Sprint Sprint Sprint. I am getting sick of hearing about Sprint and there cheap plans and the excuse for a 4G Network. HSPA and HSPA+ which happen to be 3G are fast then Clearwires 4G which is rented by Sprint. iPhone on Sprint is unlikely and if it did ever happen it wouldnt be unlimited everything for 69.99 nor 99.99. At the end of the day the iphone is staying with AT&T or going to Verizon. Verizon however thinks they don't need the iphone to be successful because they dont want to share data revenue. To bad because AT&T will hand apple what ever they ask for when it comes to money. Hence why Sprint and T-Mobile will not get it because they don't have money to burn. Verizon will eventually get it, but no until LTE is up and running in all major areas, till then better find a way to manage with AT&T or enjoy a Droid on Verizon.

  • Report this Comment On April 23, 2010, at 8:33 PM, conradsands wrote:

    Since when did stating FACTS become shilling?

    From Carl Howe at SeekingAlpha …

    In front of a standing-room-only crowd that clapped and cheered with every light-hearted dig at AT&T, Verizon, the iPhone and the Droid, Sprint CEO Dan Hesse unveiled the new HTC Evo. The hardware specs are impressive: 1 GHz Snapdragon processor, robust 4.3 inch touchscreen, 8-megapixel camera (plus a second 1.3-megapixel camera on the front of the phone), 1GB of built-in memory and 512MB of RAM, and full Flash support support. Sprint also demoed a number of new applications designed to leverage the phone’s Android 2.1 platform, including a cool visual search app called Google Goggles (say that five times fast) – just take a picture of a book cover or a famous building, and Google Goggles will return search results, really fast.

    But that’s because real story here is the device’s 4G capability. A town like Las Vegas screams out for gambling analogies, and it’s clear where Sprint is putting all its chips: on the speed and “wow” factor of 4G. After talking about WiMax for years, Sprint can now actually demonstrate its capabilities to consumers. The demos from Kevin Packingham and Fared Adib of Sprint did a good job showing how 4G is a game-changer for certain functions, especially web-browsing, video streaming (the Evo even has an HDMI-out jack, so you can stream content to your HD TV), and as a mobile hotspot, capable of providing network access to up to eight WiFi devices simultaneously.

    Words, frankly, don’t do it justice.

  • Report this Comment On April 24, 2010, at 10:23 AM, mnosense wrote:

    Look, ATT doesn't make much from iPhone subscribers. A good trunk paid UPFRONT to Apple.

    Say an iPhone user pays $70/mon including data, in 2 years of the contract ATT gets 70x24=$1680. ATT pays Apple $4-500 per handset, cost of signing each new sub is $3-400. That together costs around $800.

    So that's $880 left for ATT in 2 years. Consider the $800 is all UPFRONT cost at the beginning of 2 years!

    Please note, $70/mon is high actually. Many receive 15% descount through their companies.

    Let alone the popular data device clogs the network, iPhone is indeed just downloading bytes by bytes when surfing the web!

    Forget about LTE, I don't believe it until it's deployed in some large cities, not just running in the labs and a few airports.

    Conclusion, Verizon DOES not need iPhone, period! This article must be paid by Apple to promote iPhone to Verizon. Because ATT can't offer reliable service, Verizon simply refuses to pay the big charges upfront.

  • Report this Comment On April 26, 2010, at 11:02 AM, EquityBull wrote:

    Apple must give the iphone to verizon, period. A full half of the wireless subscribers are on Verizon and for Apple to leave half the market on the table for Google/Android to conquer is suicide.

    For that reason Jobs will cut a deal with Verizon. We will see it this year or next year at the latest. Droid continues to gain significant share and Steve Jobs knows that the Droid ecosystem is building and already has critical mass. The bigger it gets the harder it will be to get happy droid users who already paid for apps/music on droid to switch to apple.

    Jobs did not expect competition so fast and got caught in the ATT contract. In this case Apple actually needs Verizon more then VZ needs Apple. That said they both need each other.

    Once iPhone comes to VZ (and it will 100% guaranteed) Verizon stock will see a quick rise to 35 and a drift towards 40 giving 35% plus returns from here including dividend. All this within one year. Not bad.

  • Report this Comment On April 26, 2010, at 5:57 PM, Magueekane wrote:

    I am praying that Verizon will carry the iPhone. I have been wanting ine but refuse to use AT&T. I have never had any problems with Verizon and friends that have AT&T have nothing but problems. Years ago I had AT&T service and they tried to bill me for charges I did not make due to that changed my phone plan og which I was nevr notified.n I received a bill for over 1200.00 and the only way they would not make me pay was if I signed up for a year contract. This hapened years ago when they took over LA Cellular. Again, I was never notified. After that I never want anything to do with AT&T and took them off as my long distance.

    I love Verizon and have had them for many year. All of my family members are on Verizon.I have also had many of our friends join Verizon and they are also very happy with the service.

    Verizon-Please get iPhone. As bad as I want an iPhone I will NOT change service with anyone else.

  • Report this Comment On April 28, 2010, at 4:45 AM, Br0oklyn wrote:

    I Own VZ. What Should I Do. Switch It Over To S Or. Just Stick With Both?

  • Report this Comment On May 03, 2010, at 11:20 AM, Jo18 wrote:

    I am a Verizon user and have been one for years. I would like to comment on the pricing: I have a 450 minute plan (which includes 250 text messages). I don't mind that free nights don't start until 9:00 p.m. because I'm at work during the day and don't have time to talk on my cell. When I get home, I want to relax. So, 9:00 p.m. is fine for me. I'm not one of those persons whose is attached to their ear. I love the Verizon coverage and the clarity of the service. I have the Motorola Droid and am very happy with it. It does everything I can even imagine and more. If it means that my rates would go up because Verizon enters into some sort of an agreement with apple for its iphone, I'd rather Verizon stick with what it has. Verizon may not have land lines and offer bundling packages, but the service can't be beat and that's what I pay for. Please don't consider this comment as derrogative against AT&T or apple in any way.

Add your comment.

DocumentId: 1162978, ~/Articles/ArticleHandler.aspx, 4/21/2014 8:47:25 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement