Once again, AT&T (T) argues that coverage maps featured in Verizon’s (VZ) ad are misleading and falsely suggest that AT&T offers no coverage in areas where it actually does service.

“Contrary to the image presented in the Verizon ads, our wireless network is pervasive,” said an AT&T spokesman. “It covers over 300 million people, or 97 percent of the U.S. population. Our fastest, or 3G, network covers approximately 233 million people, or 75 percent of the U.S. population….[Verizon's] use of white space is misleading.”

While AT&T is deadly serious about this accusation, the fact that it must make it by referencing creatures like the Abominable Snow Monster and a pink spotted elephant makes it, well, hysterical.

“The ‘Island of Misfit Toys’ television advertisement is a parody of the ‘Rudolph the Red Nose Reindeer’ television special that depicts an island to which Rudolph travels after escaping an attack from the Abominable Snow Monster,” AT&T argues in its complaint. “The advertisement begins with outdated, discarded toys expressing surprise at the arrival of an Apple iPhone. The red Charlie-in-the-Box says ‘Hey! Check out the new guy!’ The spotted elephant, in a surprised manner, asks the iPhone ‘What are you doing here? You can download apps and browse the web!’ and a Dolly for Sue asserts that ‘Yeah. People will love you [the iPhone].’”

The complaint continues: “In response, a blue AT&T coverage map depicting large swaths of ‘white’ or ‘blank’ space across the United States appears above the iPhone. All the toys exclaim ‘Oh . . .’ in dismay, while the iPhone wilts and its screen turns dark. The toy airplane then assures the iPhone that ‘you’re going to fit right in here!’”

Finally, as AT&T describes it, “AT&T’s and Verizon’s coverage maps then appear and the announcer states, ‘with five times more 3G coverage than AT&T, Verizon Wireless is your destination for great gifts.’ The image of the sad and wilting iPhone on an island of misfit toys falsely communicates that the iPhone is a broken device because it cannot browse the web or download applications when outside of AT&T’s depicted coverage area. Further, the maps in the advertisement deceive consumers into believing that AT&T’s customers have no coverage whatsoever when they are outside of AT&T’s depicted coverage area and thus cannot use their wireless devices in many parts of the United States.”

Verizon’s attorneys are probably doubled over with laughter at this very moment.

Below, AT&T’s amended complaint in its entirety:

VerizonAmendComp _3_ –

“Despite increasing smartphone competition, Palm can maintain differentiation and remains well-positioned to launch its products with multiple new Tier-1 carriers in early 2010 by which time it should have a robust apps catalog,” Arya wrote. “While we expect the stock to remain volatile, the recent sell-off creates an interesting buying opportunity, in our opinion, for a company with an attractive platform, selling into a high-growth market, and at a compelling valuation.”

Interestingly, Arya notes that Palm’s webOS application ecosystem, initially something of a disappointment, is growing a bit more rapidly these days with between 50 and 100 apps being added to Palm’s App Catalog each week. He expects growth to continue with the debut of a new feature enabling customers to download apps simply by clicking on a URL. Arya believes this will dramatically improve discovery of apps and attract more attention from developers. His conclusion: With a more robust App Catalog and two attractive handsets, Palm is well-positioned to launch its webOS line with multiple new Tier-1 carriers like Verizon (VZ) in early 2010.

“The cost of smart phones is considerably higher than feature phones for which the early termination fees were created years ago at $175,” said Verizon spokesman Jim Gerace. He added that the new $350 ETF declines by $10 per month through the life of the contract and customers can avoid it by buying their devices off contract and paying full retail price.

An interesting move for Verizon (VZ), which just last year agreed to pay $21 million to settle a class-action lawsuit filed by California consumers over the very early-termination fees it is now increasing. The plaintiffs in the suit alleged that Verizon’s ETFs were illegal under California law and that they were designed to unfairly lock consumers into long-term contracts and prevent them from switching carriers. When Verizon settled the suit, it denied any wrongdoing, insisting that early-termination fees are simply a means of recovering legitimate costs. And to some extent Verizon does have a point.

Full retail price for the Motorola’s (MOT) new Droid is $559.99. With a two-year contract, Verizon sells the handset for $199.99. Theoretically, that’s a $359.99 subsidy (I have no idea at what price Verizon purchases Droid from Motorola). So if Verizon allowed subscribers to break their contract after a month without paying an early-termination fee, the company would stand to lose money. And subscribers who did so could subsequently sell the device online and potentially make a profit, though a small one.

So it’s certainly understandable that Verizon and other carriers want to protect the subsidies they dole out for these new smart phones. And as noted earlier, Verizon’s new ETF drops by $10 each month a subscriber remains under contract. But at this rate, subscribers are still bound to pay a $110 termination fee in the 23rd month of a two-year contract. The contract is nearly over, the subscriber obligation to Verizon almost fulfilled, yet the company can still slap its customers with nearly a third of the full ETF if they break it at that time.

By month 23 of a two-year contract, does Verizon really stand to lose $110 if subscribers decide to switch carriers? Doesn’t seem likely if subscribers can walk away just a month later without consequence, taking their handsets with them.

Since Verizon is pro-rating the ETF, why isn’t it doing so in such a way that it zeroes out by the end of the contract?

And isn’t the fast pace of innovation in the smart-phone sector such that prices–for both component and device–are dropping so quickly that high ETFs aren’t really justified? Remember, you can get Apple’s (AAPL) iPhone for $99 today. When the iPhone debuted in 2007, it commanded a price of $499/$599, depending on model.

I’ve put those same questions to Verizon and will update here when I hear back. In the meantime, here’s what Consumers Union policy analyst Joel Kelsey has to say on the matter: “When people want to switch wireless services, the biggest cost they face is early termination fees. These fees are designed to lock people into long-term contracts and stop them from getting better deals. Early-termination fees make the marketplace less competitive. Verizon’s move is painful proof that it’s time for lawmakers to crack down on these fees.”

UPDATE: Verizon Wireless spokesperson Nancy Stark offers the following answers to the questions I posed above:

Your first question regarding the balance at month 23 or 24 assumes that, at that point, we have recovered all of our subsidy and up-front costs for every device. That simply is not so.

On your second question, while the pace of innovation plays a role in prices coming down somewhat, it also plays a role in driving up costs as more and more complexity that customers want is added to phones–from premium HTML browsers to high-resolution MP cameras with optical zoom; videoplayers; music players; dual processor chipsets; WiFi; very high display resolution, operating systems such as BlackBerry, Windows Mobile, Palm, Android–ALL with the added value (vs a desktop) of mobility, and ALL in one tiny device that ALSO allows you to talk to anyone from anywhere. phew! (by comparison, I recently paid $200 for a camera and all it can do is take pictures, and it has only middle of the road capabilities.)

But getting back to ETFs specifically. The most important point is that Verizon Wireless customers do not have to have an ETF at all if they do not want to. ETFs allow customers to have it either way: They can have no ETF and pay full retail for their device. OR, they can get a greatly discounted device by having an ETF.

According to News.com, 100 people or so lined up outside Verizon’s midtown Manhattan store last night prior to its midnight opening. And various reports posted to Twitter suggest there were queues at other outlets as well, though quite a bit shorter (see below; click to enlarge).

In any event, the fact that there are lines at all must be a welcome sight for Verizon (VZ), which has been looking for a strong rival to Apple’s (AAPL) iPhone, and for Motorola (MOT), which hopes Droid will revive its much-diminished post-Razr cellphone business. As one Verizon subscriber eager to trade up to Droid told me, “it’s the best smart phone not made by Apple.”

With endorsements like this, Motorola should be working a bit harder on branding the device as its own. Right now, the Droid marketing push from Verizon Wireless is so overwhelming that you’d think CEO Lowell McAdam designed it himself. Why aren’t we hearing from Motorola as well?

“Droid is potentially a game changer for Motorola,” iSuppli analyst Tina Teng said in a recent research note. “Motorola now is no longer just emphasizing slick form factors, such as it did with its RAZR handset. The company now has focused on the hottest segment of the global mobile handset market–providing compelling smartphone products that are usable and expandable through third-party applications.”

That being the case, Motorola might want to do a bit more to get its name out there.

In its second quarter–the first with the Pre in its lineup–Sprint (S) lost 991,000 postpaid subscribers. And in its third, reported yesterday, its lost 801,000. So subscriber loss, while unquestionably gruesome, is diminishing.

How much of this is due to Palm’s (PALM) Pre? Not that much, says CL King & Associates analyst Lawrence Harris, who believes the Pre had only a moderate impact on Sprint’s postpaid subscriber base.

“Within postpaid, the number of CDMA-only subscriber losses was about 100,000 in the September quarter, compared to the 200,000 in the June quarter,” Harris wrote in a research note to clients. “At Sprint, the Palm Pre is a CDMA-only postpaid device. The number of Sprint postpaid subscribers upgrading their handsets was slightly higher in the September quarter than in the June quarter at just over 2.0 million.”

According to Harris, “This number provides some indication of the available market for all high-end devices at Sprint. In Palm’s August quarter, 85% of the company’s sales went to Sprint. Given the absence of growth in Sprint’s CDMA postpaid category, it appears likely that most of the Palm Pre sales went to existing Sprint subscribers as opposed to winning customers from other carriers.”

That would seem to be the case. Sprint rivals AT&T (T) and Verizon Wireless (VZ) each added subscribers during the second quarter–1.4 million and 1.1 million, respectively. So if the Pre did anything for Sprint, it helped to stem CDMA postpaid losses a bit.

And that’s something, right? After all, there’s no panacea for Sprint’s affliction–well, perhaps there is, but it’s locked up in an exclusivity agreement with AT&T (T). Still, when Sprint last reported earnings, CEO Dan Hesse said the carrier expected to sign up more new customers as the Pre gained wider distribution through retail outlets like Best Buy (BBY) and RadioShack. And that doesn’t really seemed to have happened. Perhaps next quarter after Sprint launches the Pre’s not-quite-cheaper sibling, the Pixi.

UPDATE: A quick addendum. In a research note this morning, Bernstein Research analyst Craig Moffett notes that while Sprint has reduced subscriber losses a bit, the cost of doing so has been worrisomely high.

“Yes, net subscriber losses were better,” Moffet explains. “But the cost was very high. Post-paid equipment subsidies soared to $139 per subsidized subscriber in Q3 (up 39 percent from last year), as the company recovered just 36 percent of their equipment costs….Yesterday’s results illustrate why it may not be possible for Sprint to have its cake and eat it too. After all the drastic cost cutting, after all the efforts to refresh the product line, after all the price cuts and new pricing plans, Sprint was able to manage only a modest improvement. Not growth, just a slightly slower rate of decline. And that Herculean effort almost broke the bank. The huge costs of even marginally improving gross additions (and the rate of net subscriber loss) crushed margins.”

In its second quarter–the first with the Pre in its lineup–Sprint (S) lost 991,000 postpaid subscribers. And in its third, reported yesterday, its lost 801,000. So subscriber loss, while unquestionably gruesome, is diminishing.

How much of this is due to Palm’s (PALM) Pre? Not that much, says CL King & Associates analyst Lawrence Harris, who believes the Pre had only a moderate impact on Sprint’s postpaid subscriber base.

“Within postpaid, the number of CDMA-only subscriber losses was about 100,000 in the September quarter, compared to the 200,000 in the June quarter,” Harris wrote in a research note to clients. “At Sprint, the Palm Pre is a CDMA-only postpaid device. The number of Sprint postpaid subscribers upgrading their handsets was slightly higher in the September quarter than in the June quarter at just over 2.0 million.”

According to Harris, “This number provides some indication of the available market for all high-end devices at Sprint. In Palm’s August quarter, 85% of the company’s sales went to Sprint. Given the absence of growth in Sprint’s CDMA postpaid category, it appears likely that most of the Palm Pre sales went to existing Sprint subscribers as opposed to winning customers from other carriers.”

That would seem to be the case. Sprint rivals AT&T (T) and Verizon Wireless (VZ) each added subscribers during the second quarter–1.4 million and 1.1 million, respectively. So if the Pre did anything for Sprint, it helped to stem CDMA postpaid losses a bit.

And that’s something, right? After all, there’s no panacea for Sprint’s affliction–well, perhaps there is, but it’s locked up in an exclusivity agreement with AT&T (T). Still, when Sprint last reported earnings, CEO Dan Hesse said the carrier expected to sign up more new customers as the Pre gained wider distribution through retail outlets like Best Buy (BBY) and RadioShack. And that doesn’t really seemed to have happened. Perhaps next quarter after Sprint launches the Pre’s not-quite-cheaper sibling, the Pixi.

UPDATE: A quick addendum. In a research note this morning, Bernstein Research analyst Craig Moffett notes that while Sprint has reduced subscriber losses a bit, the cost of doing so has been worrisomely high.

“Yes, net subscriber losses were better,” Moffet explains. “But the cost was very high. Post-paid equipment subsidies soared to $139 per subsidized subscriber in Q3 (up 39 percent from last year), as the company recovered just 36 percent of their equipment costs….Yesterday’s results illustrate why it may not be possible for Sprint to have its cake and eat it too. After all the drastic cost cutting, after all the efforts to refresh the product line, after all the price cuts and new pricing plans, Sprint was able to manage only a modest improvement. Not growth, just a slightly slower rate of decline. And that Herculean effort almost broke the bank. The huge costs of even marginally improving gross additions (and the rate of net subscriber loss) crushed margins.”

Consensus seems to be that the Droid is the device that will get Motorola back into the game. Indeed, Technology Business Research’s Ken Hyers says the Droid is likely a “serious challenger to the iPhone.”

Over at RBC Capital Markets, Mark Sue says good things as well. “The Droids are coming and Motorola will be an important part of Verizon’s push for smartphone differentiation,” he wrote in a note to clients Wednesday. “In addition to compelling products, Motorola seems to have gotten back into the good graces of the North American carrier federation, which should aggressively push the new devices.”

Of course, these endorsements don’t necessarily mean that Motorola is poised to return to its past glory. And they certainly don’t guarantee the Christmas turnaround the company is clearly hoping for. After all, the smart-phone market is far more competitive now than it was when Motorola last dominated it back in 2004.

Said Morningstar analyst Joseph Beaulieu: “[I’m not sure the Droid] will be good enough to cut through the noise that you’re getting from Apple iPhone, HTC’s Hero, Research In Motion’s BlackBerry and even Palm’s Pre and upcoming Pixi.”

Consensus seems to be that the Droid is the device that will get Motorola back into the game. Indeed, Technology Business Research’s Ken Hyers says the Droid is likely a “serious challenger to the iPhone.”

Over at RBC Capital Markets, Mark Sue says good things as well. “The Droids are coming and Motorola will be an important part of Verizon’s push for smartphone differentiation,” he wrote in a note to clients Wednesday. “In addition to compelling products, Motorola seems to have gotten back into the good graces of the North American carrier federation, which should aggressively push the new devices.”

Of course, these endorsements don’t necessarily mean that Motorola is poised to return to its past glory. And they certainly don’t guarantee the Christmas turnaround the company is clearly hoping for. After all, the smart-phone market is far more competitive now than it was when Motorola last dominated it back in 2004.

Said Morningstar analyst Joseph Beaulieu: “[I’m not sure the Droid] will be good enough to cut through the noise that you’re getting from Apple iPhone, HTC’s Hero, Research In Motion’s BlackBerry and even Palm’s Pre and upcoming Pixi.”

“This is a decision that is exclusively in Apple’s court,” said Seidenberg. “Obviously we would be interested if they thought it would make sense for them to have us as a partner. And so we will leave it with them on that score….We want to broaden the base of choice for customers, and hopefully along the way, Apple, as well as others, will decide to jump on the bandwagon.”

Analysts polled by Thomson Reuters had been expecting earnings of 59 cents on revenue of $27.17 billion at Verizon (VZ). Excluding one-time costs, the company reported a profit of 60 cents a share on revenue of $27.3 billion. That’s a 10 percent decline year-over-year, but still better than expected. (See chart below; click to enlarge.)

Wireless subscription gains, though they trailed AT&T’s (T) iPhone-bolstered numbers, were impressive nonetheless. Verizon added 1.2 million wireless customers during the quarter, raising its total count to 89 million. That’s not the two million AT&T added, but it certainly demonstrates that the absence of the Apple (AAPL) iPhone from Verizon’s handset lineup isn’t holding the carrier back all that much.

Verizon also added 198,000 net new customers for FiOS Internet and 191,000 for FiOS TV service.

“Verizon continues to generate strong cash flow, which we have used in building the foundation for sustainable, long-term shareowner value,” Verizon CEO Ivan Seidenberg said in a statement. “Even through the worst of the recession, we have continued to raise our dividend and to add new customers, expand markets and grow revenues based on the power and innovation of Verizon’s wireless, broadband and global networks.”

In a research note issued this morning, Huberty–noting that the iPhone’s market share grew 136 percent in France when Apple switched to multicarrier agreements there–said iPhone sales could more than double if the company took a similar tack in other countries.

“We expect Apple to broaden iPhone carrier distribution over the next two years and believe this opportunity is under-appreciated by the investment community,” she wrote. “This total opportunity is substantial–it adds up to an incremental 20.3M iPhone units and $3.76 in adjusted EPS, 100 percent and 41 percent of iPhone units and adjusted EPS respectively.”

Adding further details to her projections, Huberty continues: “In the top six iPhone markets that are still exclusive, we believe that Apple’s market share could rise to 10 percent, on average, in a multiple carrier distribution model from 4 percent today. These six markets represented almost 70 percent percent of iPhone shipments in C2Q09.”

Huberty also claims that if Apple (AAPL) were to end its exclusivity deal with AT&T (T) and add Verizon (VZ) as a second carrier, its share of the U.S. market would more than double, rising to 12.2 percent from 4.9 percent today.

Huberty, it should be noted, isn’t the first analyst to make such a claim. In June, Bernstein Research analyst Toni Sacconaghi said that a deal with Verizon could more than double U.S. iPhone sales in the near term. Said Sacconaghi: “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.”

Speaking at the FTTH Conference and Expo in Houston Tuesday, Verizon Communications CTO Richard Lynch said the broadband industry is headed toward a pricing paradigm shift that will see it embrace the usage-based pricing common to the wireless broadband industry.

Internet service providers “cannot continue to grow the Internet without passing the cost on to someone,” Lynch said in remarks reported by Telephony Online. “At the end of the day the concept of a flat-rate infinitely expandable service is unachievable. We are going to reach a point where we will sell packages of bytes. Now I’m not announcing a new pricing plan. But we have already gone this way in wireless because that is where the resource is most constrained.”

So while Lynch may not have announced a new pricing plan, he’s clearly got one in mind. And these, the first public comments from Verizon (VZ) on a transition to metered bandwidth, likely mean the all-you-can-eat days are soon to end and the “will this streaming video put me over my monthly usage cap” days about to begin.

Which, as consumer advocates will tell you, is bad news because charging Internet customers based on how much Web data they consume is likely to stifle innovation by undermining demand for high-bandwidth services such as online video and whatnot.

“We believe the press reports late Thursday afternoon that Verizon would not launch the Palm Pre are incorrect,” Goldberg wrote. “Our checks continue to point to healthy carrier demand for the Pre early in calendar 2010. We believe Palm has placed orders with the supply chain for another version of the Pre with features highly consistent with a Verizon launch.”

Over at Morgan Keegan & Co, Tavis McCourt was equally dubious. “Palm reiterated its FY2010 guidance, which we believe REQUIRES a launch at Verizon (you just can’t get there with just Sprint and AT&T),” he wrote. “Verizon has carried just about every Palm product in its history, and the Pre is clearly the best. We do not have insight as to the marketing support Palm will get from Verizon, but we see little risk in not getting a placement at this carrier. The timing of the rumor post-deal makes it equally as dubious as the timing of the ‘Nokia will buy Palm’ rumor during the roadshow.”

McCourt, it’s worth noting, believes the Pre will come to Verizon Wireless early next year. “Feb. holds the potential to be a strong Pre quarter as shipments to Sprint likely stabilize and distribution expands to Verizon Wireless (our assumption),” he explains. “Palm’s success at Sprint has typically been a good barometer for shipment trends at VZW and, with a postpaid sub base that’s roughly 3x as large as Sprint’s CDMA business, the market opportunity at VZW is much larger. However, Pre trends at Sprint were aided by the device’s near term exclusivity and a large base of existing Palm users upgrading their devices, both factors that VZW lacks.”

UPDATE: Jim Gerace, executive director of media relations at Verizon, tells E-Commerce Times that the company will offer the smartphone in January as planned.

UPDATED: Sources are telling Boy Genius that TheStreet.com’s report is bogus as well.

“We believe the press reports late Thursday afternoon that Verizon would not launch the Palm Pre are incorrect,” Goldberg wrote. “Our checks continue to point to healthy carrier demand for the Pre early in calendar 2010. We believe Palm has placed orders with the supply chain for another version of the Pre with features highly consistent with a Verizon launch.”

Over at Morgan Keegan & Co, Tavis McCourt was equally dubious. “Palm reiterated its FY2010 guidance, which we believe REQUIRES a launch at Verizon (you just can’t get there with just Sprint and AT&T),” he wrote. “Verizon has carried just about every Palm product in its history, and the Pre is clearly the best. We do not have insight as to the marketing support Palm will get from Verizon, but we see little risk in not getting a placement at this carrier. The timing of the rumor post-deal makes it equally as dubious as the timing of the ‘Nokia will buy Palm’ rumor during the roadshow.”

McCourt, it’s worth noting, believes the Pre will come to Verizon Wireless early next year. “Feb. holds the potential to be a strong Pre quarter as shipments to Sprint likely stabilize and distribution expands to Verizon Wireless (our assumption),” he explains. “Palm’s success at Sprint has typically been a good barometer for shipment trends at VZW and, with a postpaid sub base that’s roughly 3x as large as Sprint’s CDMA business, the market opportunity at VZW is much larger. However, Pre trends at Sprint were aided by the device’s near term exclusivity and a large base of existing Palm users upgrading their devices, both factors that VZW lacks.”

UPDATE: Jim Gerace, executive director of media relations at Verizon, tells E-Commerce Times that the company will offer the smartphone in January as planned.

UPDATED: Sources are telling Boy Genius that TheStreet.com’s report is bogus as well.

Sources close to the company tell TheStreet.com that Verizon has reconsidered its plans to add Palm’s new smart phone to its lineup.

An interesting rumor, but clearly one that’s to be taken with a grain of salt, if not a salt lick entire.

Why? Well, Palm (PALM), which declined comment on the report, just yesterday reaffirmed its fiscal year 2010 outlook and its planned product and carrier launches. Which means it doesn’t foresee any material changes in its business in the near future. Presumably, Verizon (VZ) passing on the Pre would count as such a change.

Moreover, the same sources who told the TheStreet.com that Verizon was going to give Palm the high hat also said the company might take a more diplomatic approach to the situation and simply order just a few Pres with no intention of lending the device much marketing support.

So, as I said, to be taken with a grain of salt…

One thing’s certain, though: If the rumor does prove true, it’s a serious blow not just to Palm, but to Verizon customers pining for a decent handset as well. Unless, of course, Verizon has cut an iPhone deal with Apple (AAPL)–in which case it’s just lousy news for Palm.

UPDATE: Analysts who follow Palm are already lining up to debunk TheStreet.com’s report.

Sources close to the company tell TheStreet.com that Verizon has reconsidered its plans to add Palm’s new smart phone to its lineup.

An interesting rumor, but clearly one that’s to be taken with a grain of salt, if not a salt lick entire.

Why? Well, Palm (PALM), which declined comment on the report, just yesterday reaffirmed its fiscal year 2010 outlook and its planned product and carrier launches. Which means it doesn’t foresee any material changes in its business in the near future. Presumably, Verizon (VZ) passing on the Pre would count as such a change.

Moreover, the same sources who told the TheStreet.com that Verizon was going to give Palm the high hat also said the company might take a more diplomatic approach to the situation and simply order just a few Pres with no intention of lending the device much marketing support.

So, as I said, to be taken with a grain of salt…

One thing’s certain, though: If the rumor does prove true, it’s a serious blow not just to Palm, but to Verizon customers pining for a decent handset as well. Unless, of course, Verizon has cut an iPhone deal with Apple (AAPL)–in which case it’s just lousy news for Palm.

UPDATE: Analysts who follow Palm are already lining up to debunk TheStreet.com’s report.

“We expect Apple to add new iPhone carriers in the U.S. within the next year (likely with a new product launch next summer), Munster writes. “By way of example, for various reasons the company moved from an exclusive relationship with French wireless carrier Orange to a multi-carrier model. In France, the company now enjoys dramatically higher market share (in the 40% range vs. about 15% in ROW) than in countries with exclusive carrier agreements (such as AT&T in the U.S. where the iPhone has market share in the mid-teens). We believe Apple is seeing the increased unit sell-through more than offset the slightly (~10%) deteriorated economics per unit involved in non-exclusive agreements.”

If Munster’s prediction proves true, it will undoubtedly be welcomed by iPhone owners–nearly a third of whom listed AT&T as the feature they dislike most in the iPhone in a recent ChangeWave survey. But it will be ugly news for AT&T (T), which could suffer some serious subscriber defections if the company loses its iPhone-exclusivity deal–particularly if Apple signs on Verizon (VZ) as a second carrier. As Pali Research recently noted:

“As the iPhone exclusivity period rolls off between AT&T Wireless and Apple, a material number of AT&T customers will flock to Verizon’s superior network. We estimate that nearly a third of AT&T’s post-paid customers are being retained by AT&T primarily because of the iPhone exclusivity.”

“We expect Apple to add new iPhone carriers in the U.S. within the next year (likely with a new product launch next summer), Munster writes. “By way of example, for various reasons the company moved from an exclusive relationship with French wireless carrier Orange to a multi-carrier model. In France, the company now enjoys dramatically higher market share (in the 40% range vs. about 15% in ROW) than in countries with exclusive carrier agreements (such as AT&T in the U.S. where the iPhone has market share in the mid-teens). We believe Apple is seeing the increased unit sell-through more than offset the slightly (~10%) deteriorated economics per unit involved in non-exclusive agreements.”

If Munster’s prediction proves true, it will undoubtedly be welcomed by iPhone owners–nearly a third of whom listed AT&T as the feature they dislike most in the iPhone in a recent ChangeWave survey. But it will be ugly news for AT&T (T), which could suffer some serious subscriber defections if the company loses its iPhone-exclusivity deal–particularly if Apple signs on Verizon (VZ) as a second carrier. As Pali Research recently noted:

“As the iPhone exclusivity period rolls off between AT&T Wireless and Apple, a material number of AT&T customers will flock to Verizon’s superior network. We estimate that nearly a third of AT&T’s post-paid customers are being retained by AT&T primarily because of the iPhone exclusivity.”

That’s the word from agency Chairman Julius Genachowski, who says he’s concerned not just with the competitive ramifications of carrier-exclusivity deals, but with their tendency to limit customer access to top smartphones. “There are markets in the country where if you wanted an iPhone, if you wanted a Pre, you just couldn’t get it–from anyone,” Genachowski told Bloomberg. “So one question is, is that consistent with broad consumer interests?”

Vermont residents and those living in the rural areas of other states who can’t use the iPhone because AT&T (T) offers only roaming coverage there would likely say the answer to that question is no. But AT&T, Verizon (VZ) and other Tier 1 wireless carriers disagree. They claim exclusive handset deals are beneficial.

“The popularity of the iPhone and its innovative features and applications…has provoked an unprecedented competitive reaction,” James Cicconi, AT&T’s senior vice president of external and legislative affairs, wrote in a letter to the Senate Judiciary antitrust subcommittee. “Exclusive handsets have provided U.S. consumers the most advanced devices in the world at distinctly affordable rates. By allowing a carrier and a manufacturer to share the enormous risks and costs of bringing an inventive but unproven new device to market, exclusive arrangements both quicken the pace of technological advancement and incentivize the carrier to offer even greater handset subsidies to its customers.”

Verizon argued that point as well in a recent letter to Congress’s Telecommunications Subcommittee. “Exclusivity arrangements promote competition and innovation in device development and design,” the company said. “We work closely with our vendors to develop new and exciting devices that will attract customers. When we procure exclusive handsets from our vendors we typically buy hundreds of thousands or even millions of each device. Otherwise manufacturers may be reluctant to make the investments of time, money and production capacity to support a particular device.”

In some cases, perhaps. Though I doubt Apple (AAPL) and Research in Motion (RIMM), maker of the BlackBerry, feel that way these days. If there’s reluctance anywhere, it’s reluctance on the part of carriers like AT&T, which can’t bear the thought of losing its exclusive on the iPhone, without which it will face defections and slowing growth.

“The current environment is challenging,” CFO John Killian told analysts during an earnings call Monday, noting that the layoffs we’ve read so much about the past year have badly hurt demand for wired and wireless connections, PC laptop cards and other business services. In fact, so challenging is the environment that Verizon (VZ), which has already eliminated 8,000 jobs in the past year, plans to cut another 8,000 in the second half of this year. “Candidly, we are looking at all other areas of expense,” Killian said.

And what of Verizon’s disputed claims that it plans to add Palm’s (PALM) Pre to its lineup in the near future? The company insists they’re true. During this morning’s conference call, company execs confirmed they plan to carry the Pre “early next year.”

So says Pali Research, which in a research note this week argued that AT&T (T) should be very worried about the prospect of Verizon adding the iPhone to its handset lineup.

“As the iPhone exclusivity period rolls off between AT&T Wireless and Apple, a material number of AT&T customers will flock to Verizon’s superior network,” the firm states. “We estimate that nearly a third of AT&T’s post-paid customers are being retained by AT&T primarily because of the iPhone exclusivity.”

An unsettling thought for AT&T, whose five-year agreement to be the iPhone’s sole U.S. provider is reportedly set to expire in 2010. Especially since there are several compelling reasons for Apple to offer the iPhone to Verizon (VZ).

For one thing, the move would give Apple access to about 80 million new Verizon customers. For another, it would bring the iconic device to a carrier that might, you know, reasonably support all its features, a carrier whose LTE “4G” network isn’t four-to-five years off, a carrier whose name doesn’t elicit laughter and jeers at Apple’s Worldwide Developers Conference.

So why extend AT&T’s exclusive deal? If there’s a good reason, Pali doesn’t see it. The research house is betting on the iPhone coming to Verizon. And when it does…

“We expect AT&T Wireless net subscriber additions to fall to less than 1 million in 2010 from more than 4 million in 2008. With an LTE-based iPhone in 2011, we believe Verizon could take even more market share resulting in a contraction in AT&T’s subscriber base in that year.”

So says Pali Research, which in a research note this week argued that AT&T (T) should be very worried about the prospect of Verizon adding the iPhone to its handset lineup.

“As the iPhone exclusivity period rolls off between AT&T Wireless and Apple, a material number of AT&T customers will flock to Verizon’s superior network,” the firm states. “We estimate that nearly a third of AT&T’s post-paid customers are being retained by AT&T primarily because of the iPhone exclusivity.”

An unsettling thought for AT&T, whose five-year agreement to be the iPhone’s sole U.S. provider is reportedly set to expire in 2010. Especially since there are several compelling reasons for Apple to offer the iPhone to Verizon (VZ).

For one thing, the move would give Apple access to about 80 million new Verizon customers. For another, it would bring the iconic device to a carrier that might, you know, reasonably support all its features, a carrier whose LTE “4G” network isn’t four-to-five years off, a carrier whose name doesn’t elicit laughter and jeers at Apple’s Worldwide Developers Conference.

So why extend AT&T’s exclusive deal? If there’s a good reason, Pali doesn’t see it. The research house is betting on the iPhone coming to Verizon. And when it does…

“We expect AT&T Wireless net subscriber additions to fall to less than 1 million in 2010 from more than 4 million in 2008. With an LTE-based iPhone in 2011, we believe Verizon could take even more market share resulting in a contraction in AT&T’s subscriber base in that year.”

The deal will put AT&T (T) that much closer to parity with Verizon (VZ), which surpassed AT&T to become the largest wireless carrier after its January acquisition of Alltell. Together, the two account for about 60 percent of all U.S. cellular subscribers. 

[Image Credit: IntoMobile]

The deal will put AT&T (T) that much closer to parity with Verizon (VZ), which surpassed AT&T to become the largest wireless carrier after its January acquisition of Alltell. Together, the two account for about 60 percent of all U.S. cellular subscribers. 

[Image Credit: IntoMobile]

We consider cable’s local WiFi initiatives to be nothing more than a marketing stunt.

–Verizon spokesperson Rich Young, Feb. 28, 2009

Looks like AT&T (T) and Cablevision’s decision to offer free WiFi to their subscribers has gotten a competitive rise out of Verizon (VZ), which just a few months ago was dismissing such efforts as “marketing stunts.” The Wall Street Journal reports that Verizon plans to offer its subscribers free Wi-Fi hotspot access via a partnership with Boingo Wireless. Discussions between the two companies are still progressing, but a deal is expected sometime soon with service debuting this summer — perhaps in preparation for the launch of that media tablet Verizon’s rumored to be talking to Apple (AAPL) about.