Verizon’s iPod Touch Problem

  • Posted: 28 November 2009 12:30 PM #16

    Dean Lewis - 25 November 2009 05:27 PM

    I’m with AT&T and have been considering getting an iPod Touch with Skype for a while now. I pay $45-50 a month, have to pay extra for text messages and have no data plan. Other services aren’t that much different in price. Going VOIP would save me $30-35 a month and is probably a good idea since I’m rarely out of wifi range and often just answer phone messages anyway…  The Touch and Skype (among others) are a thorn for many providers, not just Verizon, at least for a certain number of potential phone customers.


    I have a 3rd gen 32GB iTouch and while Skype works very well in terms of making quality voice calls, it drains the Touch’s battery in about 45 minutes.
    Battery extenders cover the Touch’s headphone input, (as does the charge cable) so they are not an option. Skype is aware of this but offers no solution. So using the iTouch for voice calls is not really a viable alternative to a cell phone at this time.

         
  • Posted: 28 November 2009 02:29 PM #17

    macorange - 25 November 2009 09:04 AM

    It’s bad enough for Verizon that they keep losing customers to AT&T because of the iPhone, but the iPod Touch must also be an increasingly huge thorn in their side.  Verizon is trying to get its customers to trade up to smartphones and data plans, but for the millions of Verizon users who have an iPod Touch, many, if not most, are quite content to keep using their old Verizon phone for calls and the iPod Touch for everything else.  Having an iPod Touch makes it palatable for Verizon users to wait another year to see if Verizon gets the iPhone.

    Its rather incredible to think about it, but all those millions of iPod Touches are being carried around by people who also carry around phones, except for young kids.  As for the kids with iPod Touches and without cell phones, each year hundreds of thousands will be old enough to get their first cell phone.  Most of them will want an iPhone, and some of them will get the whole family to switch to AT&T to get it.

    I think macorange makes an excellent point with this post. When one consider the scope and reach of the iPhone’s impact, one must consider the success of the iPod touch.

    Verizon desperately needs an Apple product and I suspect the company is now willing to pay handsomely for it.

         
  • Posted: 28 November 2009 03:15 PM #18

    dave1812 - 26 November 2009 02:33 AM

    Since I have a MiFi unit, I get the best of both worlds—a great browser in the Touch, along with the reliability of my LG.  I won’t get any kind of smartphone until they make one that doesn’t require rebooting constantly to keep it functional.  In my case, Verizon wins, because my MiFi monthly expense is identical to the cost of 2 smartphone plans.  But the MiFi is so much more useful than just a smart phone.  We can hook up our netbooks or other computers we own, to the MiFi, when on vacation or when our home network or Comcast internet goes down.  MiFi is pricey but awesome!

    For those thinking this is a complete broadband replacement, do consider that even for $60 a month, there’s a 5GB cap.  Additionally, if you’re not going to use this all the time, you can pay full price for the MiFi ($250?  IIRC) rather than get a 2 year contract, and just turn the data plan on and off adhoc, paying only for those days you actually enable the service.  So if you only want to use the MiFi when on vacation or a few months out of the year, it might be more cost-effective to go that route.

    BTW, I’m on a Verizon Family Plan.  Like most others here, there’s no way I’m going to upgrade to a data plan, nor go the Droid/Eris route, when I’ve got a 64GB Touch.  Matter of fact, both of my teens have independently grown tired of the “smart” phones, and want something simple they can make calls on and text with.  They’ve been spoiled by the Touch’s superior UI and features, and Verizon’s lineup just doesn’t have anything to offer (i.e., it doesn’t have the iPhone).

         
  • Posted: 28 November 2009 05:03 PM #19

    Alphaman - 28 November 2009 07:15 PM

    BTW, I’m on a Verizon Family Plan.  Like most others here, there’s no way I’m going to upgrade to a data plan, nor go the Droid/Eris route, when I’ve got a 64GB Touch.  Matter of fact, both of my teens have independently grown tired of the “smart” phones, and want something simple they can make calls on and text with.  They’ve been spoiled by the Touch’s superior UI and features, and Verizon’s lineup just doesn’t have anything to offer (i.e., it doesn’t have the iPhone).

    I think this insightful post corroborates macorange’s point quite nicely.

    I also think it indicates Verizon does have a problem no matter how many ads the company runs about the Droid or the perception of superior call coverage vs. AT&T. Verizon desperately needs an Apple device that runs on its network.

    My situation has worked out a bit differently. I have several iPhones on my family plan. There are trade offs. I won’t pay for premium cable channels with all of the content available through the iTunes store that runs on a Mac, iPhone or iPod touch and through Apple TV. I wouldn’t choose to have a home phone if it wasn’t part of a service bundle. The way I look at the iPhone is the iPhone has saved me the need for a laptop. That savings is plowed into my monthly cell phone bill. As an aside, the iPhone has turned out to be a helpful homework aid for members of the household who do quite a bit of school research over the 3G network.

         
  • Posted: 28 November 2009 06:35 PM #20

    Verizon really seems to not like Apple and Apple customers much.

    I have recently signed up for FiOS and was thinking about getting the “middle” plan that comes with free WiFi at all Verizon hotspots. Guess what - WIndows-only.

    I have no idea why - probably because they have some weird registration plugin or something. The WiFi’s gotta be the same, just getting to it is not possible.

    So I declined in the more expensive plan

         
  • Posted: 28 November 2009 07:32 PM #21

    DawnTreader - 28 November 2009 06:29 PM

    Verizon desperately needs an Apple product and I suspect the company is now willing to pay handsomely for it.

    Exactly, DT.  And this is a HUGE asset that doesn’t appear on the balance sheet.  Call it “Future Revenue Sharing”.  You can’t book it because it doesn’t exist yet, but if you were trying to determine the value of AAPL a few years out you better be taking this asset into account.  Whenever AT&T’s exclusivity runs out (probably next year), Verizon will make a substantial offer to share (through subsidies or otherwise) its wireless subscription revenues with Apple for some piece of the Apple ecosystem.  Sprint and T-Mobile will do the same.  AT&T will counter with a large offer to retain exclusivity.  The MINIMUM value of the Future Revenue Sharing asset is the aggregate of all the wireless telco’s bid to break AT&T’s exclusivity, but AT&T may end up keeping exclusivity by outbidding that. 

    I don’t know what these bids will be, but they are enormous, and the success of the iPod Touch, not just the success of the iPhone, is increasing the value of the Future Revenue Sharing with each passing quarter. 

    All analysts take a stab at predicting future sales in deriving their price targets, but few of them are factoring in this asset. What’s amazing about the iPhone from an economic perspective is not how much margin Apple makes on each iPhone, but the fact that NONE of this margin is paid for by the consumer.  Consequently, it’s not about how many iPhones consumers will buy at what price points, its all about how much the wireless telcos will share their wireless subscription revenues with Apple to be able to attract and retain current iPhone users, current iPod Touch users who are one purchase away from being iPhone users, and tens of millions more people with iPhones and iPod Touches on their Xmas and birthday wish lists.

         
  • Posted: 28 November 2009 11:13 PM #22

    I see AT&T padding the features offered to iPhone users ahead of the end of exclusivity.

    AT&T took a huge financial gamble on the iPhone and it’s paying off handsomely. Verizon in my view no longer has a real choice in the matter. Android 2.0 phones will be commoditized through multiple handset offerings on multiple carriers.

    GOOG’s plans for the Android OS don’t require a standout handset as much as it requires popular adoption regardless of carrier and handset price.

    I see a Verizon deal coming and posted a few minutes ago at Eventide accordingly.

    Verizon in my view will offer a rich subsidy for the sake of carrying the iPhone, to slow or stop defections to AT&T for the device and drive growth in use of data plan handsets on its network.

    I see VZ as a future iPhone plan available today.

         
  • Posted: 29 November 2009 04:53 AM #23

    but the fact that NONE of this margin is paid for by the consumer.


    I don’t see it that way.

         
  • Posted: 29 November 2009 08:55 AM #24

    danthemason - 29 November 2009 08:53 AM

    but the fact that NONE of this margin is paid for by the consumer.


    I don’t see it that way.

    Indirectly, of course, the consumer pays for everything, but directly its the telco buying the phone from Apple for about $600 of which the consumer pays only $200.  The $400 difference is about equal to Apple’s margin on the device.  In the next negotiation, Apple may force T to pay (to retain exclusivity), say $800, but the consumer will still pay only $200.  Perhaps this time the $800 won’t be a fixed upfront amount, but rather an ongoing percentage of T’s fees, as it was reported Apple was originally negotiating for last time. 

    I can’t think of an analogous situation in any other industry.  Uniquely with cell phones, and taken to the extreme with the iPhone, the bulk of the sale price is not set by the demand/supply equation of the consumer.  If it was,  Apple could only charge about $300 and make a modest profit.  The insanely great profit comes from Apple holding up the telco for a share of its service charges on its provision of pipe.  Because the iPhone is bringing in new customers for T, Apple can negotiate not only a share of the data service charges, but also a share of the voice service charges. 

    Already this “tax” on the telco represents a very substantial share of Apple’s total profits.  Its highly material.  When exclusivity runs out and negotiations begin, the rampant success of the iPhone should mean an increase in this tax, paid by the winning bidders.  This increase is potentially more valuable than any other asset Apple has, although it can’t be booked yet.  But it would be a mistake to ignore it in valuing AAPL.

         
  • Avatar

    Posted: 29 November 2009 12:29 PM #25

    macorange - 29 November 2009 12:55 PM
    danthemason - 29 November 2009 08:53 AM

    but the fact that NONE of this margin is paid for by the consumer.


    I don’t see it that way.

    Indirectly, of course, the consumer pays for everything, but directly its the telco buying the phone from Apple for about $600 of which the consumer pays only $200.  The $400 difference is about equal to Apple’s margin on the device.  In the next negotiation, Apple may force T to pay (to retain exclusivity), say $800, but the consumer will still pay only $200.  Perhaps this time the $800 won’t be a fixed upfront amount, but rather an ongoing percentage of T’s fees, as it was reported Apple was originally negotiating for last time. 

    I can’t think of an analogous situation in any other industry.  Uniquely with cell phones, and taken to the extreme with the iPhone, the bulk of the sale price is not set by the demand/supply equation of the consumer.  If it was,  Apple could only charge about $300 and make a modest profit.  The insanely great profit comes from Apple holding up the telco for a share of its service charges on its provision of pipe.  Because the iPhone is bringing in new customers for T, Apple can negotiate not only a share of the data service charges, but also a share of the voice service charges. 

    Already this “tax” on the telco represents a very substantial share of Apple’s total profits.  Its highly material.  When exclusivity runs out and negotiations begin, the rampant success of the iPhone should mean an increase in this tax, paid by the winning bidders.  This increase is potentially more valuable than any other asset Apple has, although it can’t be booked yet.  But it would be a mistake to ignore it in valuing AAPL.

    I have to disagree with you on this theory.  Apple is not the only device maker so to think the subsidy will increase much is unrealistic IMO.  The current subsidy is high by historic standards but is based on the ARPU of an Iphone vs a standard voice only or text and voice phone.  When Apple delivered the 1st Iphone it was unsubsidized, but the carrier ATT provided part of the monthly revenue.  The Iphone subsidy at that time was estimated at 15-18 per month or 360 to 432 per two year contract.  When Apple went the subsidy route with ATT,  ATT raised the monthly plan by $15 per month for the same service.  $10 for 3G data and $5 for text.  The ATT subsidy is estimated at 400 to Apple.  Additionally, I believe ATT pays Apple if they are the retailer of the handset contract.  From what I’ve read about non-exclusive carriers the negotiations focus on guarantee on the number of units.  Couple examples

    Russian Iphone deal
      China Iphone deal
      Israel Iphone deal

         
  • Posted: 29 November 2009 03:07 PM #26

    IIRC, the original revenue sharing deal was based on an enterprise model in which the carrier provided a discount on monthly service based on a handset volume contract. Apple was treated as if it were the volume purchaser of services with the volume discount paid to Apple rather than the consumer.

    With the release of the 3G iPhone the arrangement changed to a more conventional subsidy model.

    I don’t see AT&T paying more for each iPhone even if the company retained exclusivity. It wouldn’t make economic sense for T to pay significantly more for each iPhone and such an price hike would draw the ire of Congress and would become the focus of Congressional hearings and most likely an effort to ban exclusive handset contracts through legislation.

    At the same time I don’t see the end of exclusivity having an appreciable impact on the subsidies paid. It’s a popular phone in high demand and it is a handset Verizon has learned the hard way is a “must have” for its customers.

         
  • Posted: 07 December 2009 10:10 AM #27

    A mobile device research report released yesterday puts some hard data behind the discussion we had last week about the importance of the iPod Touch to the ongoing smartphone wars:

    http://blog.flurry.com/bid/28786/Flurry-Smartphone-Industry-Pulse-November-2009

    The most interesting statistic to me is game usage on mobile platforms.  While Android use has increased substantially over the past six months, Android’s share of the gaming market shrunk.  This is consistent with reports from game developers that they are seeing very little revenue from the Android platform. 

    It’s also interesting to see how irrelevant the other platforms are.  Its a two-horse race, folks, and Apple’s horse is three turns around the track and Google is barely out of the gate, particularly in the important gaming market.