Why the street is wrong about what the iPhone means to Verizon

For months and months we have speculated (and been right) that the iPhone would inevitably come to Verizon and end AT&T’s reign of exclusivity with the popular consumer device – the time seems to finally be upon us.  Yet, all of the naysayers are now trying to convince us that the iPhone may be more trouble than it’s worth for Verizon; that subsidizing (the cost of being able to offer that sexy $200 price-point) the iPhone will crush Verizon’s margins; that bandwidth consumed by iPhone users might cripple Verizon’s network; that iPhone might cannibalize Verizon’s more profitable Android sales; and that somehow the moment we’ve been waiting for since the launch of the first iPhone might not be all it’s cracked up to be as a user experience, or as an investment.

Now let’s take a look at why none of he above will prove to be much, if any, headwind to the Verizon/iPhone experience:

The cost of subsidizing the iPhone will cripple Verizon’s margins.

Perhaps, and perhaps you’re mad.  Verizon is a $100 billion company, a significant portion of which is the landline/Fios business (Verizon [VZ] only owns 50% of Verizon wireless) if you’re worried about iPhone having an extreme negative impact on margins please bring it on, because iPhone sales would have to be extraordinary to affect margins much in the short run – and the long-run it should be a non-issue.  And like most carriers, Verizon limits the number of times per year you can upgrade phones and pay the discounted price (like the $200 iPhone) – so everyone who upgraded to Android or a Blackberry within the last 12 months will have to pay full-price or wait; therefore you can try to believe that iPhone will cannibalize Android or hurt margins, but not both – you are not allowed. Even if Verizon’s margins are hurt but the subsidy of new phone sales (with new contracts) all of those customers will extend (or sign) their contracts, and the rest will be defecting from other carriers – so if we see growing revenues with a hit to margins at Verizon, we’d probably see a hit in revenues at other carriers.

iPhone users will completely over-run and/or cripple Verizon’s great network.

Imagine the iPhone is LeBron James and that Verizon is the NBA.  Now realize that Verizon has known that “free-agency” was coming for several years and they have ramped their network accordingly – like NBA teams clearing salary cap space to compete for LeBron – they have capacity, 4G has come online, they have further investments to the network scheduled, and if they really need more bandwidth they can always buy Sprint or T-Mobile.  Again, if the network is crippled short-run (which is when I’d be worried, because they’re still improving their network) I’d have to chalk it up to a ‘good problem to have’ because it would indicate that not just usage, but also sales were fantastic – you’re no crippling that network overnight.

Cannibalizing Android sales…….money out of one pocket and into the other, and at lower margins.

As we discussed, I believe this issue is overdone.  Will it occur?  I’m sure it would have to at some level, but realize this: while Android has been growing market share, that growth has been accelerating.  Therefore a disproportionate amount of Android devices are likely to have been purchased more recently, and accordingly these users will not be eligible for an upgrade to buy a $200 iPhone – and several Androids are priced well below iPhone, meaning they are not in competition.  The dominant expectation continues to be that many iPhone users will defect from AT&T, hold-outs at Verizon will finally buy the phone they want, and others will move to Verizon that wouldn’t, for one reason or another, move to AT&T.

But, is that it?

This may be just the tip of the iceberg. Verizon seems to be the leader in 4G; so we should expect to see 4G versions of the iPad and iPhone in the not to distant future.  I also believe that Verizon’s network is good enough that continued success could prompt Apple to release other phones (an Apple phone not called iPhone?) – perhaps even one with a keypad. Analysts have said that the iPhone going to Verizon was priced-in the stock after is recent move, but that the market hadn’t discounted all of the above concerns .  The fact of the matter is that the market has already discounted the above, and Verizon will not likely fall into the category of “victim of its own success” – at least not any time soon.

Trading Notes: I’m not here to say if Vodaphone (the other 50% owner of Verizon wireless) is a better play than VZ – that’s up to you.  I do happen to believe Spring will be bought, or possibly merge.  And if you’re wondering what I think of AT&T – if my friend (and account manager) ever quits there I will run, not walk, to the nearest Verizon.

To be fair: I am at the time of writing, and/or manage accounts that are,  long Apple, Verizon, and Sprint. Members of family own Google.

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