Verizon Might Dance to Apple’s iPhone Fiddle

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Verizon may be willing to play Apple’s game when it comes to the iPhone, according to Kaufman Bros. analyst Shaw Wu. A deal between the two companies is “closer to reality,” and Verizon may be more willing to pay what Apple wants under Apple’s terms as Android “starts losing some of its luster (at least at Verizon).”

This would mark a shift in the rumored negotiations between the two companies, as Verizon previously hadn’t wanted to pay the same stratospheric subsidies AT&T pays for each iPhone signed up on its network. The telecom has also been unhappy with the notion of leaving Apple in charge of the customer experience, as it is with almost all of its carrier partners.

“Times have changed,” wrote Mr. Wu in a research note to clients obtained by The Mac Observer. “Apple is back in the driver’s seat with a record 14.1 million iPhone shipments in the September quarter helping AT&T gain share against VZ over the last two quarters as Android starts to lose some of its luster (at least at VZ). In addition, our sources indicate that VZ does not believe the pending launch of BlackBerry 6 on its network is likely to have a material impact.”

Another factor playing into the negotiations, according to industry and supply chain checks conducted by Kaufman Bros., is that Verizon may be willing to pay more than (i.e. what AT&T pays) to keep the device exclusive to AT&T and Verizon in the U.S., and off of Sprint and T-Mobile.

The iPhone has been the single biggest drive in customer growth for AT&T, helping Ma Bell to close much of the distance between itself and Big Red. AT&T has enjoyed an exclusive five year deal on the iPhone, but that five year contract will be up as soon sometime-in-2011, according to a variety of reported leaks and informed speculation (the smart money is on the summer of 2011).

While Verizon wants to end AT&T’s exclusivity on the device, the company doesn’t necessarily want every other carrier to get it, too, according to the reasoning laid out by Mr. Wu.

Apple makes a lot of money from carrier subsidies on the iPhone, and many analysts have worried that once the five year deal with AT&T ended, Apple wouldn’t be able to sustain those subsidy levels. If Verizon is willing to dance to Apple’s fiddle, however, those concerns will not be borne out.

It’s also why a Verizon iPhone is much less likely to look like this:

The Verizon iPhone We Hope Not to See

The analyst maintained his “Buy” rating on Apple’s stock, and a price target of US$380.

Shares in Apple traded higher Monday, edging back towards record territory (the stock hit an intra-day record high of $322.33 during the morning session), to close at $320.15, a gain of $2.71 (+0.85%), on moderate volume of 15.9 million hands trading hands.

*In the interest of full disclosure, the author holds a small share in AAPL stock that was not an influence in the creation of this article.  

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Comments

CityGuide

Surely, even rendering the advertising appliques in PhotoShop had to make you feel queasy.

RonMacGuy

Very interesting article.  I never would have thought about the “Verizon paying more to keep iPhone to just AT&T and Verizon” aspect to this.  No matter what, 2011 will be an interesting year for sure.

Tiger

So do we call it semi-exclusive for 2011?

JonGl

This bugs me. I would rather see the iPhone on every service _but_ Verizon. They really need to be brought down to size, IMO.

-Jon

Lee Dronick

but_ Verizon. They really need to be brought down to size

They could start by removing Flash from the Verizon website smile

jfbiii

Color me skeptical. For starters, even if you go back all the way to Jan. 9, 2007, five years ? anytime in 2011. If I’m AT&T, and I negotiated a five year exclusivity deal, I wouldn’t have negotiated a deal that started ticking more than 6 months before the phone was available for sale. Now, they’ve renegotiated since then, and it’s possible that the original five year deal was whittled down during the course of those negotiations. But, even if it were, when was the last time anybody released credible information on the end date for this deal? Never.

Ross Edwards

@jfbiii, Any contract has remedies in the event of breach, generally a penalty payout to the non-breaching party.  If the amount Apple would owe ATT under a breach is far less than Apple will get from VZ by offering iPhones to VZ’s infinity customers, it would make sense for Apple to breach.  The math is pretty simple in that respect.

ATT knows this perfectly well, and that’s why the “informed speculation” is that they negotiated a settlement.  Legally speaking, it’s likely.  It is the way in which all parties stand to end up with the most money and the lowest losses from litigation expenses.  Whether that settlement was a period of exclusivity on the iPad or something else is anyone’s guess.

The upshot of all this is that there is FAR too much money being left on the table if the iPhone doesn’t appear on VZ sometime in 2011.  Apple, ATT, and VZ will not leave that money on the table.  It does stand to reason that we won’t see anything until the June release window, though.  Makes for a nice smooth one-year contract option.

I am not your attorney, and the foregoing is not legal advice.

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