John Paczkowski

Recent Posts by John Paczkowski

Q: Should Apple Bring the iPhone to Verizon? A: Yes.


With the AT&T (T) iPhone exclusivity deal set to expire in mid-2010, Apple (AAPL) has a big decision to make: extend that deal, or abandon it and sign on Verizon (VZ) as a second carrier partner.

In a note to clients today, Bernstein Research analyst Toni Sacconaghi considers the implications of both choices and concludes that the latter is the best option for Apple. Why? A deal with Verizon could more than double U.S. iPhone sales in the near term.

“Verizon’s postpaid subscriber base is not only larger than AT&T’s, but more importantly, is untapped whereas we estimate more than 10 percent of AT&T’s postpaid users already have an iPhone,” Sacconaghi explains. “Since the iPhone first launched in June 2007, AT&T has reported activating 2.6M units of the first-generation iPhone and 5.9M of the iPhone 3G, for a total of 8.5M units through the end of March 2009. This represents 14 percent of AT&T’s total postpaid subscriber base of 61M; assuming 1.5M iPhones have already been retired (despite the fact that even the very first iPhone buyer is still on his/her two-year service contract), we estimate 11-12 percent of AT&T’s postpaid base currently uses an iPhone. Within AT&T’s smartphone user base, we estimate the iPhone’s penetration is around 35 percent (given 32 percent of AT&T’s postpaid subscribers use smart phones–as confirmed by CEO Randall Stephenson). This suggests Apple has increasingly limited opportunity to attract new iPhone users within AT&T’s base; and if Apple maintains exclusivity with AT&T, iPhone sales will increasingly be driven by replacement sales, making it critical for Apple to introduce compelling new models.”

An attractive scenario for Apple, although–as Sacconaghi suggests–it does have its downside. Were Apple to refuse to extend AT&T’s iPhone exclusivity, the carrier would almost certainly reduce the subsidy it currently pays on the device. Untethered from AT&T, the iPhone would no longer be the powerful subscriber retention tool it once was. Sacconaghi figures that might inspire AT&T to crop the subsidy it pays on the device from an estimated $450 to around $250 to $350. If that were to happen, Apple might be forced to modestly raise the iPhone’s retail price, perhaps to $249, and take hit on margins.

Of course, might is the operative word here, because given the iPhone’s tremendous impact on AT&T’s wireless business, the last thing the company wants to do is annoy Apple. And really, what room does AT&T have to negotiate here? It’s not like it can suddenly stop selling and supporting the iPhone…

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik