Another Massive Opportunity for Apple

With reports of the iPhone heading to Verizon (NYSE: VZ  ) seemingly popping up every week, it has become easy to filter out each new report as background chatter. After all, this is the Castro of rumors, it just won't die! However, with The Wall Street Journal now confident enough in its usual unnamed sources to splash "Verizon to Get iPhone by Early Next Year" across its homepage, is it time for investors to once again believe the rumor mill?

Another day, another rumor
It's not that there isn't ample rationale for Apple (Nasdaq: AAPL  ) to bolt to Verizon. Despite the massive popularity of the iPhone, Apple's U.S. market share has remained flat throughout 2010 as phones based on Google's (Nasdaq: GOOG  ) operating system spread throughout every carrier and saw sales explode. Not only that, but in countries where Apple has pursued a multi-carrier strategy, its market share dwarfs its comparable U.S. share. A recent Gartner and Morgan Keenan smartphone report pegged Apple's Canadian mobile market share at around 12.4%, in France, the number sits at 11.6%, and in the United Kingdom, Apple commands 10% of the market. In all these markets, Apple uses multiple carriers.

Apple's U.S. mobile market share: 6.5%. As another example, the iPhone is also only sold through one carrier in Japan and holds a 5.2% market share.

Why you should remain skeptical
Despite how much sense an Apple and Verizon tie-up makes, we've seen these head fakes from even the most trusted financial sources before. In March of this year, The Wall Street Journal reported that Apple was working on a CDMA iPhone that'd be compatible with Verizon's network. In June, Bloomberg threw its weight behind a Verizon-based iPhone report.

Still, the vast production of differing components needed to equip a launch for a large carrier like Verizon requires long lead times. If Apple is readying to end its exclusive relationship with AT&T (NYSE: T  ) in the U.S., now is the time that supplier orders would start leaking.

Qualcomm: always the source of the rumor
As always with a Verizon-inbound iPhone, Qualcomm (Nasdaq: QCOM  ) takes center stage. Qualcomm is a leading supplier of the chipsets needed to run smartphones on Verizon's network. When TechCrunch recently reported that Verizon would get the iPhone in January, it was on reports that Qualcomm had issued a massive order of chipsets for a Verizon iPhone.

So, Qualcomm gets a natural bump based on any iPhone news. However, it's also important to note that iPhone sales might come at the expense of Android models using Qualcomm's Snapdragon processor, so there's a healthy level of cannibalization that should temper Qualcomm investors' enthusiasm for this bit of news.

Complicating matters is the unlikely situation where Apple is buying chips from Qualcomm not for a Verizon iPhone, but to power iPhones on AT&T's network. While Qualcomm is known mainly for its expertise developing chipsets for CDMA networks like Verizon, it also produces solutions tailored to a network like AT&T's.

Winners and losers of a Verizon iPhone
If rumors do prove correct, notable smartphone companies that would be affected include Samsung, HTC, and Motorola (NYSE: MOT  ) . The companies have all benefited from Verizon placing high amounts of promotion behind their phones, pitching them as "iPhone killers." With the iPhone firmly on board, Verizon's incentive at promoting its alternative Android lineup fades away.

Lastly, Sprint Nextel (NYSE: S  ) could see an eventual boost from the news. Sitting on the sidelines while rival Verizon gets the coveted iPhone doesn't sound ideal for the company, but it also means that Apple has extended its supply chain to include CDMA-based chipsets. Since Sprint, like Verizon, uses a CDMA network, a Verizon iPhone increases the chance Sprint could make a run at getting the iPhone on its own beleaguered network.

Show caution
If an iPhone for Verizon is coming in time for early next year, expect reports to keep flowing out over the next two months. There's just too many suppliers to keep a launch this large a secret.

While Apple loses benefits from for its exclusive arrangement with AT&T (the company collects higher margins thanks to generous subsidies from AT&T, which would decrease if they used multiple carriers) and has to create separate models for differing networks and extend its list of suppliers, this is a massive opportunity for the company. The iPhone's strength in international markets has proven that the benefits of pursuing a multicarrier strategy outweigh any downsides.

Not only that, but Apple gets to slow down the growth of competing Android models. While the two platforms are successfully co-existing for now, it's never a bad idea to put the brakes on a rival that's attracting a significant amount of development talent and diminishing Apple's lead in dynamic apps that consumers crave.

So show caution, but if you're an Apple investor, there's every reason to be excited about a Verizon iPhone.

Eric Bleeker owns no shares listed above. Google and Sprint Nextel are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor choice. The Fool owns shares of Apple, Google, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (15)

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 October 07, 2010, at 12:40 PM, pk22901 wrote:

    "the company collects higher margins thanks to generous subsidies from AT&T, which would decrease if they used multiple carriers"

    Although the AT&T subsidy might lessen some, I believe the the new carrier subsidies will match the current AT&T level due to the predictable huge addition to the new carrier bottom lines for the 1st 18 months of iP4 availability.

  • Report this Comment On October 07, 2010, at 1:05 PM, demodave wrote:

    How do you reconcile 6% of the smartphone market as reported here with 25% of recent sales as reported here:

    http://www.fool.com/investing/general/2010/10/07/googles-rob...

    Paragraphs 2 ('smartphone report pegged') and 3 ('US mobile market share') seem to mix smart phones and cell phones. ... Is that it? This could use a little bit more clarity.

    At any rate, I see a CDMA launch as very positive for Apple, and it should indeed worry competitors who have been allowed to coast along in CDMA land. Apple made the right choice going with GSM first, but being in both worlds woudl be better.

  • Report this Comment On October 07, 2010, at 1:24 PM, SMKEYWORDS wrote:

    With published reports of Android-based phones now outselling Apple's iPhone offering, and given the fact that for the most part the people who want an iPhone already have one, I ask the following question: "Does it really matter if the iPhone goes to Verizon?"

    Unless this new CDMA phone has true 4G network capabilities, either LTE or WiMax, preferably both, other than saying "I've got an iPhone", what's the point of owning one?

    I see some problems with this article. Take for example when the author, Eric Bleeker, describes Sprint-Nextel's network as being "beleaguered". I equate this to something like saying Michael Phelps struggles in water. This athlete has multiple Olympic gold medals to illustrate his speed in the pool much like Sprint-Nextel has garnered much acclaim and recognition for being the first wireless provider to deliver the fastest network performance over a growing number of locations across the USA.

    So when some says that the iPhone going to Verizon presents "Another Massive Opportunity for Apple", this is like saying selling their new model of hammer at Home Depot provides "Another Massive Opportunity for Stanley". In fact, it only gives both of them another channel for customers to buy their products, no more, no less.

    Comments?

  • Report this Comment On October 07, 2010, at 4:08 PM, CristiAllen wrote:

    Hi – Cristi Allen with Sprint here. Eric, I like the direction you took with this and I like where you are going with your analysis. But I am struggling with one thing. Like one of the other posters here, I am wondering how you can say “Sprint’s beleaguered network?” What about the Sprint network conjures up that term? A few facts to consider:

    • Our networks are functioning at best-ever levels and customers are noticing. In a recent University of Michigan study, the American Customer Satisfaction Index recognized Sprint as the most improved company in customer satisfaction, across all industries, in the last two years. And that’s just one of the many third party accolades Sprint has received in 2010.

    • “No one has a more reliable network than Sprint based on a recent 13 city 3G performance test” – PC World

    • No one has a larger voice calling area than Sprint. Sprint’s voice calling area reaches more than 307 million people in the U.S., Puerto Rico and the U.S. Virgin Islands with your Sprint phone and a plan that includes roaming.

    • The Sprint 3G network reaches more than more than 274 million, including roaming.

    • The Nextel National Network reaches more than 278 million people and more than 17,500 cities.

    • Sprint is the only national wireless carrier that offers 4G and it is currently available in 55 markets. By the end of 2010 Sprint will launch 4G in major markets like New York and San Francisco, covering 120 million people in total.

    Again, nice work. But I think I’d have to disagree on that one point. How about “Sprint’s superior network?”

  • Report this Comment On October 07, 2010, at 5:55 PM, isaquejr wrote:

    Totally agree with SMKEYWORDS.

  • Report this Comment On October 07, 2010, at 6:12 PM, SMKEYWORDS wrote:

    Eric,

    Sometimes in a rushed effort to respond to comments made, people don't take the extra time and effort to ensure not only what they're writing is well thought out and accurate, but also without any obvious errors.

    Fortunately for most of us out there, word processing applications have almost eliminated a large percentage of the grammar and spelling mistakes we risk making were it not for the warnings that pop up on our screens as we compose our messages.

    But common courtesy dictates that if someone provides a name along with their comment, the exact same spelling of the name be used when responding to the comment.

    The lady's name is "Cristi" and not "Kristie".

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