In the third quarter of last year, Apple's (Nasdaq: AAPL) iPhone was estimates to account for 80% of AT&T's (NYSE: T) smartphone purchases, a significant source of revenue for any company from one account. Things were well and good due to AT&T's exclusive iPhone deal, but now the smartphone world is taking a turn -- and it could be a turn for the worst for the former iPhone giant.
Opening the doors to another player
By now, almost everyone has the heard the news: Verizon (NYSE: VZ) will start selling the iPhone on February 10th, less than a month from now. The formerly exclusive life of AT&T customers as being sole owners of the iPhone in the U.S. is coming to a quick end, and Verizon customers couldn't be happier.
Pricing for the device will be the same -- $199 for a 16GB and $299 for the 32GB version. Right now Verizon hasn't disclosed the full details of its pricing plan, but says that it will in the near future. Considering the fact that for the most part, the device and the price points will be of no differentiation, it is up to the two companies to see who can market themselves better, who has the better network, and who can find ways to separate themselves from the pack.
An uphill battle for AT&T
So far analysts are estimating that Verizon will sell between 10 and 12 million iPhones this year. Of course there is no way to know how many of those will be from Verizon customers, and how many of those will be from disgruntled AT&T customers that choose to defect. AT&T has a 38% lead in smartphone market share, followed closely by Verizon's 27% -- so the amount of defectors is going to play a major role in how successful AT&T can be in 2011.
AT&T certainly faces an uphill battle. Their spotty network and frequently dropped calls have been a major thorn in the side, and Verizon has taken aim at these inefficiencies in their own marketing campaigns. To make matters worse, AT&T was rated the worst among wireless carriers in a recent Consumer Reports survey. Indeed, Lowell McAdam, Verizon's chief operating officer, recently said that Verizon had the "most reliable" network of any carrier.
The network troubles that have plagued AT&T give customers from various carriers the opportunity to shift plans while still having the iPhone option. The big question is how many people shift, and how this will effect AT&T's bottom line moving forward.
The good news is corporate calling and laziness
AT&T hasn't been sitting on its laurels, however. It's been able to diversify its product mix by incorporating phones that utilize Google's (Nasdaq: GOOG) Android operating system, many of which were formerly offered by Verizon as an alternative to the iPhone. It's also working aggressively to improve its network, John Stankey, CEO of AT&T Business Solutions, was recently quoted as saying "[the company should] bounce back in the majority of the U.S. very, very quickly during the first part of this year as that material [network coverage] gets put into service over the next several weeks."
AT&T is already on the offensive. At CES, the main annual industry event, AT&T began aggressively promoting an upcoming slate of Android phones that will run on the company's "4G" network. AT&T's "4G" network is actually an upgraded version of its existing 3G network, but like T-Mobile, AT&T will market it as "4G" to compete with Verizon's recent launch of its LTE network. Key among these phones was Motorola's (NYSE: MMI) Atrix, which is being promoted as a "superphone" thanks to its use of a powerful Tegra processor from NVIDIA (Nasdaq: NVDA). Since the iPhone 4 can't connect to AT&T's "4G" network, expect the company to swing its promotional weight behind Android models in the coming months, providing a boost to Android sales which should be slowing on Verizon's network.
Furthermore, AT&T has the advantage that about 80% of their customers are on corporate or family calling plans, and these types of plans generally have much higher rates of retention. Accordingly, about 75% of AT&T's customers have at least one year left on their contracts, and obviously AT&T has plenty of room to offer incentives to get those customers to extend their plans even more.
Lastly, AT&T could benefit immensely from a phenomenon called "cognitive lock-in", essentially the notion that although people will complain about networks or service and will threaten to switch carriers, the truth is that most will not. While some may call it "cognitive lock-in," I call it "general laziness." Yes, I have an iPhone on the AT&T network, and I have also been annoyed by dropped calls. But when the iPhone becomes available from Verizon, I doubt that switching carriers is going to jump to the top of my "to-do" list.
The Foolish bottom line
Considering the fact that pricing will remain the same (at least for now), the two carriers should expect to compete on two main playing fields: network and customer service. It still remains to be seen whether or not Verizon's network can carry the heavy data load that a horde of new iPhone users may cause, so the game is still wide open. These two companies will have to work hard to generate brand loyalty, a difficult proposition when selling what is essentially a commodity product.
This should benefit the customer in the end as AT&T and Verizon compete to win over our hearts with good service -- and hopefully our wallets with possible cheaper pricing. Whether or not it will benefit AT&T or Verizon is still up for grabs, but as an investor, I'd be watching this one closely.
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