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- Don D., California
Apple of AT&T's Eye
Former Apple (AAPL) CEO Steve Jobs rolled out the iPhone on January 9, 2007 and became available to AT&T (T - Free AT&T Stock Report) customers on June 29th of the same year. Unlike any device offered previously, the iPhone could function as a camera, a portable media player, an Internet client with email and web browsing capabilities (using either Wi-Fi or 3G connectivity), and it could send texts and receive visual voicemails. The phone’s user interface is built around the device’s multi-touch screen, which includes a virtual keypad instead of a physical one. In addition, third-party and Apple application software is available from the “App Store”, which was launched in mid-2008 and now offers more than 425,000 Apple-approved apps, which run the gamut from games and GPS navigation to social networking.
AT&T had a monopoly on the iPhone from the time it was introduced until February of this year. Although techies loved the new phone, as well as the three newer versions that have been introduced since, they were unimpressed by the way in which AT&T handled initial phone activations, with the company’s system unable to process activations in a timely fashion. What’s more, AT&T’s network seemed to be far from stellar, with many subscribers dismayed by dropped calls and dead zones. As a result, many expected that disgruntled AT&T customers would flee to Verizon Wireless, which is known to have particularly good service, once the company began offering its version of the phone. During the first quarter of the year, VZ Wireless added 906,000 wireless subscribers on contract-based plans, more than double the number of a year ago. What’s more, through mid-April, Verizon (VZ - Free Verizon Stock Report) had activated 2.2 million iPhones, putting it on track to achieve estimates of 11 million iPhones sold by the middle of the year.
However, the tides turned a bit during the June interim, when Verizon Wireless signed up 1.3 million fewer iPhone customers than AT&T. Indeed, Verizon Wireless activated 2.3 million such phones during the period, compared to 3.6 million activations by AT&T. Nevertheless, it is important to note that Verizon Wireless added 1.3 million wireless subscribers on contract-abed plans during the quarter, which is double the year-earlier figure.
Clearly, AT&T has done a much better job of holding on to its iPhone customers than was expected. Price may very well be an issue here, as VZ Wireless only sells the iPhone4, which starts at $200, whereas AT&T still offers the older iPhone 3GS for $49, a much more affordable entry point. Moreover, VZ Wireless now expects it will take a quarter longer than expected to increase its smartphone user base to 50% of its subscribers, given that Verizon’s new iPhone model that was supposed to be released this summer has been postponed until the fall. Nevertheless, it is important to note that Verizon Wireless added 1.3 million wireless subscribers on contract-abed plans during the quarter, which is double the year-earlier figure.
AT&T recently agreed to buy T-Mobile USA from Deutsche Telekom AG (DTEGY) for approximately $39 billion in stock and cash, which may be a bit of a wild card. Indeed, the transaction would make AT&T the nation’s largest wireless operator, with a subscriber base of roughly 130 million, versus the current title holder, Verizon, which has about 100 million customers. The deal would likely create new opportunities for AT&T to increase smartphone penetration and data revenues, potentially at Verizon’s expense, as well as result in about $3 billion in annual synergies within three years of the transaction closing. However, on August 31st, the Obama administration filed to block the proposed takeover because of anti-competition concerns, with the Justice Department stating that, in its opinion, the deal would “remove a significant competitive force” with AT&T and T-Mobile competing in approximately 97 of the top 100 U.S. wireless markets. The death of the deal would be expensive for AT&T, as it agreed to a cash breakup fee of $3 billion on top of giving spectrum to T-Mobile USA. However, the Federal Communications Commission has yet to make a decision on the deal, so there is still hope it may go through.
Finally, battling for new iPhone customers is likely to become a bit more fierce, as Sprint Nextel Corp. (S) announced last week that it will begin selling the new version of the phone in mid-October
In summation, what seemed to be almost a sure bet for Verizon Wireless has tuned out, thus far, to be far from it. Although the company is likely to gain iPhone market share going forward, it is important to also note that this growth comes at a price, namely increased costs resulting from sales of the heavily subsidized iPhone, which puts pressure on margins. Moreover, although Verizon would obviously like to increase its number of iPhone activations (since smartphones typically generate higher average revenue per user (ARPU)), increasing the number of new customers who switch to Verizon Wireless would likely help boost both the top and bottom lines as well—something AT&T seems to be more successfully at of late. Finally, the battle for new iPhone customers is likely to become a bit more fierce later this year, as Sprint Nextel Corp. announced last week that it will begin selling the new version of the phone (which is expected to be called iPhone 5) in mid-October of this year. Acquiring the right to sell the phone is a big win for Sprint, whose results have been tempered by the lack of an iPhone offering. Indeed, the company blamed “competitive headwinds” for a decline in its contract subscribers during the most recent quarter, the first full quarter both AT&T and Verizon offered the phone. Providing its subscribers with an iPhone option ought to help Sprint retain many of its customers looking to upgrade to a smartphone, which could put a bit of pressure on the two other iPhone players.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.