Verizon Will Get a Screaming Deal on the iPhone

With each passing day, Google (Nasdaq: GOOG  ) is becoming more like Microsoft as Android becomes the Windows of the mobile world.

New data from researcher Canalys show that while Apple's (Nasdaq: AAPL  ) iPhone is now the top-selling handset in the U.S., combined sales of Android handsets from HTC, Motorola, and others -- collectively part of the Open Handset Alliance  -- now account for roughly 44% of the U.S. market:


"Android has been well received by the market and in some geographies it is becoming a sought-after consumer brand. It has rapidly become the platform to watch, and its growing volumes will help to entice developers, ensuring consumers have access to an increasingly rich and vibrant mobile content and application ecosystem," Canalys senior analyst Pete Cunningham said in a press release.

But again, Android isn't the only winner here. Both Apple's and Google's gains have come at the expense of Research In Motion (Nasdaq: RIMM  ) , Canalys said in its report. For years, the company behind the BlackBerry line of smartphones led the North American market. Now, the iPhone and Android phones are surging in front of it.

A short-lived victory for the iOS
Trouble is, when you look at operating systems rather than handsets, Android is gaining share so fast that Apple is either going to have to license iOS, or sign more carrier deals to keep up. The latter is the only realistic option, and both Verizon (NYSE: VZ  ) and Sprint Nextel (NYSE: S  ) know it.

The implication? Neither carrier is going to pay what AT&T (NYSE: T  ) did in order to win an iPhone distribution agreement. Instead, it's Apple that I believe will sacrifice some points of profit margin in order to bring the iPhone to Verizon's network next year. Given Android's continuing success, the company has little other choice.

Now it's your turn to weigh in. How much margin will Apple sacrifice in order to put the iPhone on Verizon and other U.S. carrier networks? Let us know by voting in the poll below and then leave a comment to explain your thinking.

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Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Apple, Google, and Microsoft and is also on Twitter as @TheMotleyFool. Its disclosure policy breaks out in the robot dance from time to time.


Read/Post Comments (19) | Recommend This Article (3)

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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 November 02, 2010, at 8:30 PM, 415el wrote:

    Other than the anti-establishment folks, everyone will get an iPhone. I don't have an iPhone because I can't get AT&T signal at home, but neither do I have an Android because when you put the 2 side-by-side, the Androids navigates like something made very poorly, from a UI point of view. It is clunky, the icons are messy, scrolling between pages doesn't feel slick, even switching between the landscape and portrait mode feels awkward (it feels like the developer and the product manager both had a tight timeline and didn't care about how it's going to feel). Overall, it feel like it's developed and designed by the same people who brought you Windows 2.0. Whereas the iPhone has all of Apple OS' DNA. I don't mind paying for the initial cost of $200. But if I'm paying the same $30 every month, I want to know that I'm not getting an inferior product.

    It's different from a Mac or a PC. With computer it's a one time cost, if it's 30% cheaper, then it's 30% cheaper. But with a 2 year contract @ $30 a month totaling ($720 + Taxes) I'll be paying the same amount regardless of a iPhone or an Android. It's the same cost for a better product, no questions it's the iPhone that's going to win out.

  • Report this Comment On November 02, 2010, at 8:40 PM, demodave wrote:

    Tim, you seem to be limiting iOS' success to only the iPhone, and overlooking the iPod Touch and the iPad. Those two devices are also selling well. I doubt that Apple is going to have to bend and scrape to get Verizon to sign up. Sure, Android ships more units. They aren't internally systemically compatible. And there's a lot of BOGOF going on. Apple's not hurting in this fight.

  • Report this Comment On November 02, 2010, at 8:45 PM, Henry3Dogg wrote:

    The numbers suggest that iOS and Android activation rates are currently about equal with iOS a little ahead.

    Android is ahead on smartphones and iOS is ahead on none phone devices.

    Consider the whole picture and your story makes no sense!

  • Report this Comment On November 02, 2010, at 8:48 PM, Foolorama wrote:

    I wonder. I know that the "semi-closed" systems are better inherently from a user perspective (because they work more dependably), but Google may be the "low cost" solution for new smart phone buyers. I remember the PC/Mac situation when a poorer, less capable system was embraced by the 90% market, leaving the better system in the 5% category. Maybe with the internet and easier comparisons Apple will win out. Interesting point though, with regard to the main cost being comparable. That being the case, if the point can be made, Apple will win that fight.

  • Report this Comment On November 02, 2010, at 9:08 PM, jgappleinvestor wrote:

    you forget that there is a world outside the US and that is where a lot of Apple's growth is coming from. The VZ deal is needed for Apple but no so much so that they would sacrifice margins.

  • Report this Comment On November 02, 2010, at 9:18 PM, aeosfool wrote:

    Hello, why does Apple have to be #1? They do not sell the most computers, but make more money than any other computer manufacturer...that sounds like a formula they would like to continue with mobiles.

  • Report this Comment On November 02, 2010, at 10:04 PM, conradsands wrote:

    Verizon Wireless pays $25M to end FCC fee probe

    Verizon Wireless has agreed to pay $25 million to the government to settle an investigation of the "mystery fees" it improperly charged millions of customers for data sessions they never intended to launch, the Federal Communications Commission said Thursday.

    The "voluntary payment," which the FCC said is its largest on record, comes on top of the refunds Verizon plans to issue to around 15 million customers, as it announced earlier this month. Those refunds will total at least $52.8 million, the FCC said.

  • Report this Comment On November 02, 2010, at 10:04 PM, conradsands wrote:

    From ABC News …

    Verizon Wireless to Pay Back Customers for Accidental Data Fees

    More than a year ago, Teresa Dixon Murray says she started to feel something wasn't right about her family's Verizon Wireless cell phone bill.

    "I was getting $1.99 charges on usually two out of my three accounts," said Murray, a reporter with the Cleveland Plain Dealer and the mother of two teenagers with cell phones.

    She said that her family was being charged for Internet use but no one was using the Internet. The mystery charge even appeared, she said, when one of her sons' phones was locked away after he'd lost phone privileges.

    "I knew absolutely, positively for sure. No accidents. No excuses, that this was wrong," she said. "And I was absolutely livid.”

    After months of complaining to Verizon, Murray wrote a newspaper column. After that, she got the company's red carpet treatment and her money back. Her situation was settled -- but thousands wrote to her saying that they'd had the same problem.

    Now thanks to a Federal Communications Commission investigation into Verizon Wireless, some of those customers could see credits of $2 to $6 on their October or November bills.

    Last year, the FCC questioned Verizon Wireless about a $1.99-a-megabyte data access fee that had appeared on the bills of customers who didn't have data plans but who had accidentally initiated data or Web access by pressing a button on their phones.

    Verizon Wireless said that it had stopped charging such fees when a customer started using a data service and then shut it off quickly. It blamed the continued overcharging on a software glitch and has agreed to pay up to $90 million in refunds to affected consumers.

    The FCC said Sunday that it had been examining the charges after consumers' complaints.

    "We're gratified to see Verizon agree to finally repay its customers," FCC Enforcement Bureau Chief Michele Ellison said in a statement.

    "The carriers have 50 [million], 60 [million] or 90 million customers and they charge everybody every month a few extra bucks," said Ed Finegold, Validas' chief analytics officer. "That adds up to billions in profits for them, so they have every incentive in the world to do it."

  • Report this Comment On November 02, 2010, at 10:05 PM, conradsands wrote:

    In a poll that asked 4,040 smartphone users in March how many dropped calls they had experienced in the past three months, AT&T — the exclusive U.S. carrier of Apple's iPhone and iPad mobile devices — came in dead last among the country's four largest carriers.

  • Report this Comment On November 02, 2010, at 10:06 PM, conradsands wrote:

    AT&T and Verizon are both too expensive. They have attempted to confuse the marketplace by lowering their pricing to $69.99, but their unlimited plan at that price is for calling only.

  • Report this Comment On November 02, 2010, at 10:42 PM, Aryabod wrote:

    When you use the HTC Evo for a week after having used the iPhone for the same amount of time there is no way in hell you could say the iPhone has any advantages over the Evo.

    The Evo is by far a grade above the iPhone. It has twice the iPhone's 3G coverage, it has a 4G radio that works in 61 cities in the USA on the only network with a legitimate 4G platform, it drops far fewer calls than the iPhone, it has the ability to change batteries within 5 seconds, it has a higher resolution camera, its screen at 4.3 inches renders it as a competitor to the iPad, it has a front and back camera that can be used for tele-conferencing without being tethered to a WiFi hotspot. It can enable 8 different WiFi devices to the cloud, It has HDMI out, it permits Adobe Flash and most importantly has google embedded applications.

    And now you can use the phone in most metro areas in the USA on a 4G platform, which the iPhone won't be able to do until 2012, if we are believe Apple's own admissions.

    Los Angeles and New York City are now 4G capable and San Fransisco, Denver and Miami will come online next month.

  • Report this Comment On November 02, 2010, at 10:53 PM, Aryabod wrote:

    The HTC Evo and the Samsung Epic were the first generation of phones that surpassed the iPhone in technological prowess, however the next generation of 4G phones will widen the gap to a point where even the Apple Fans will find it difficult to deny the fact that Apple has taken a second seat.

    The problem with Jobs is that he thinks he can replicate a freak accident in history. While the competition was sleeping Apple took advantage of the advancements in technology and chip designs to produce the iPhone, however he did not invent Linex, the chips that go into the iPhone or any of its innards. In fact he did a wonderful job of using everyone elses technology to produce the iPhone. You can not deny him he credit that he deserves but please don't put a halo over his head because everyone else was sleeping while he was thinking.

  • Report this Comment On November 02, 2010, at 11:00 PM, Aryabod wrote:

    The HTC Evo is my iPad and iPhone in one. It can do everything plus more than both of Apple's best devices. Best of all it is much more portable and costs substantially less. An iPad and iPhone will cost you around $1,000 while the Evo will cost you $200. The Evo will also cost you no more than $80/month for unlimited Data, GPS, Voice and Text while the iPhone will cost you $50 more every month for much less. The Evo works on a superior 3G platform that is twice the size of ATT's 3G platform and it also work with the only 4G carrier in the USA.

  • Report this Comment On November 02, 2010, at 11:56 PM, dstnewman wrote:

    Good article Tim.

    Apple said during its recent conference call that they expected margins to drop over the next year... my thoughts at the time were exactly like yours - they will sacrifice margins for volume, namely with Verizon and Sprint. This is going to be huge for both Verizon and Sprint, with Verizon being the better investment of the two.

    I have written articles regarding Verizon iPhones on my website at www.marketplayground.com.

    Regards Tim,

    Brian "Newman" Rayl

    www.marketplayground.com

    www.satelliteradioplayground.com

  • Report this Comment On November 03, 2010, at 1:15 AM, SkippyJohnJones wrote:

    It would set a nasty precedent if Apple made pricing concessions to US carriers to gain share. Apple just reported 90% YoY gain in units on iPhone, with production capacity as their only restraint to growth (their words, not my opinion). The "loss" of share to Android needs to be taken against the explosive growth in market size.

    I'm happy with my iPhone, but my point isn't about product superiority/deficiency. I'm sure some Androids are technically superior on the basis of technical specs, especially given carrier choice and frequent iterations. However, Apple is still THE phone against which all others are compared. If they can maintain a #2 share in US (assuming they pass RIM) and continue to gain on Nokia globally, they will have no incentive to begin discounting.

    The explosive growth of iPad, with its mind boggling 95% satisfaction / 4% neutral / 1% mild dissatisfaction ratings released today, will continue to fuel the iOS adaption - especially for business users.

  • Report this Comment On November 03, 2010, at 1:26 AM, SkippyJohnJones wrote:

    Also, a much more relevant statistic is prepaid subscriptions and customer churn among US wireless carriers. For each of the last seven quarters, ATT has managed to generate larger net subscriber growth than the Verizon. This is significant given the perception that ATT has a poor network, and the fact that Verizon is growing from a larger installed base. If this fact isn't solely attributable to the iPhone, then someone please explain to me what I'm missing. Here is a link to the chart that clearly shows the growth of ATT:

    http://www.businessinsider.com/chart-of-the-day-if-att-is-so...

    Now who has the weaker stance?

    A) Verizon, with its slower growth due to the absence of iPhone

    or

    B) Apple with its slower growth due to the absence of Verizon

    Apple claims they are selling iPhones as fast as they can be made. I don't imagine Verizon is signing up subscribers in line with the full capacity of its network.

    Sprint and T-Mobile combined are also enough to double iPhone presence in US without talking to Verizon. Something tells me the weaker siblings of ATT and Verizon would pony up almost anything for the rights to the hottest electronic gadget on the planet. This only adds more leverage to Apple's side; I wouldn't want to sit across from the team from Cupertino in any negotiation.

  • Report this Comment On November 03, 2010, at 5:46 AM, AdhocHavoc wrote:

    I agree with Skippy. Verizon is not the only other wirless presence in the U.S. Apple could just as well approach Sprint, and T-Mobile, for deals, instead of Verizon. Verizon knows it screwed up when negotiations fell through, the first time. Now, they have to make up for lost ground.

    Secondly, why is it that these conversations ultimately turn into a spec war? Time and time again, Apple has been able to prove that it's not about specs to the majority of the consumer. It's about overall user experience, and that's where Apple has everyone else beat.

  • Report this Comment On November 03, 2010, at 11:17 AM, SkippyJohnJones wrote:

    Not to beat a dead horse, but it is also worth noting that Tim Cook has directly addressed the issue on multiple earnings calls. He has said, in no uncertain terms, that average selling price does not drop when carrier exclusivity ends. Analysts have asked the question different ways, but the answer is consistent. There is enough data now to support his assertion, as several countries have gone from single-carrier to multi-carrier models for Apple. Why should we assume that Verizon would be any different?

  • Report this Comment On November 03, 2010, at 2:14 PM, ttelliw64 wrote:

    When it comes to leading the charge on fiber broadband deployment VZ is the clear frontrunner. The magnitude of the effort is daunting. It is hard to get your head around it.

    The next time you are in an airplane, look out the window and imagine the shear physical effort (never mind the money, time and politics) it would take to run a strand of fiber to every building you see below you. You would be hard pressed to successfully send a simple postcard to all those places!

    I wonder if the visionaries that constructed the railroad systems in this country so long ago, would have simply surrendered their lofty goals, had they the luxury of that view? Where would this country be today had they not taken that risk?

    I say “Go VZ Go”, do what is right, not only for your shareholders, but for this country as well! Speaking of doing what is right for our country, where is our political leadership on this issue? Fiber broadband deployment, (and yes there IS a difference between FIBER broadband deployment and what everyone else is calling broadband deployment), should be the MOST SIGNIFICANT part of this country’s economic, energy, infrastructure, healthcare, environmental and social policy agenda, as it is in all the other countries we compete with.

    Why is our political leadership so myopic on this issue? JFK and Eisenhower knew their initiatives on space and a highway system had intrinsic value well beyond the moon and automobiles. They were foundation initiatives, catalysts for incredible growth and prosperity! Stimulus? How about more cash for fiber and less for asphalt?

    Fiber broadband deployment is not just about making our personal computers faster and having more High Def channels! It is about building an electronic foundation that will improve EVERYTHING else we do! Did you hear me EVERYTHING else! While the politicians and regulators hyper-focus on perceptions of inequity, creating an effective governor (pun intended) on fiber deployment, the country lags the rest of the world in GDP growth. I tell you, it is criminal!

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