Making Sense of Apple and Verizon

There have been reports of Apple and Verizon talking about a possible new Apple product. Or two.  AT&T desperately wants to keep the iPhone for itself as an exclusive, but Apple is thinking 3G and Verizon may not be. Here's a way to make sense of it all.

The one driving principle of Apple is growth and success in the mobile phone market. That doesn't mean desktops and notebooks will go away soon, it just means that Apple needs to seize the opportunity now while it has the mind share and momentum. To that end, Apple is indeed very happy with its relationship with AT&T. At the last Apple earnings report, Apple's Tim Cook responded to this question by Piper Jaffray's Gene Munster:

Q: "I've got a question on the iPhone. Our survey work suggests the exclusive relationship with AT&T is the number one reason why people don't purchase an iPhone. Given the revenues no longer exist, can you walk us through your thinking of why remain exclusive through AT&T ...?"

A: "On AT&T, Gene, we view AT&T as a very good partner. We believe that they're the best wireless provider in the U.S. and we're very happy to be doing business with them. They have done a very good job with iPhone. They put the full force and weight of their company behind it. It is a major strategic thrust for them. So, we're very happy with the relationship that we have and do not have a plan to change it."

Mr. Cook is a very smart fellow, and I take his comments to mean that the current iPhone as a GSM device on AT&T's network is secure ... for now. However, it doesn't mean that Apple couldn't add another partner with a new product.

Meanwhile, Verizon's CEO Ivan Seidenberg has been coy about the iPhone. The best reports say that Verizon passed on the iPhone because of Apple's desire for revenue sharing. I believe, along with others, that Mr. Seidenberg has regretted that decision, but cannot publicly admit it. And Mr. Jobs has enjoyed making Mr. Seidenberg pay for not believing in him and Apple.

To save face, Mr. Seidenberg said, according to the Wall Street Journal on Tuesday," Apple never had any intention of making a CDMA" version of the iPhone. The Verizon CEO instead claimed that it was just a maneuver to obtain leverage in the AT&T negotiations.

That just doesn't have the ring of truth. Apple was desperate in early 2007 to have a carrier partner. Apple didn't like the idea of becoming a MVNO. The company had no assurance that the iPhone would indeed become a hit, and so limiting themselves to CDMA in the U.S. could have been a reasonable baby step forward. GSM would come in time. So Mr. Seidenberg is being disingenuous.

Alternatively, if Apple wanted to make a CDMA version of the iPhone now, it could with impunity. The parts are cheap. A minor mod to the production line wouldn't lose a lot of money, but would gain important U.S. market share. After all, if Apple did deliver a CDMA phone to Verizon, current AT&T users couldn't jump ship simply by pulling their AT&T GSM SIM card and moving over to Verizon. So AT&T can't complain, and the relationship between Apple and AT&T remains good, just as Mr. Cook described it. 

I believe the overture Apple has made to Verizon. Despite the fact that Verizon posted strong first quarter earnings, has more subscribers than AT&T, and added more new customers than AT&T in the first quarter (1.3M vs 1.2M), Verizon would still like to find a way to blunt the iPhone advantage AT&T has. And the revenue it generates for AT&T.

A smaller, cheaper, slightly less capable CDMA version of the iPhone or a so-called "Media Pad" with CDMA voice would give Mr. Seidenberg a way to save face and take away AT&T's perceived exclusivity with Apple. Verizon can still make money migrating those CDMA iPhone customers to LTE. On the Apple side it would expand Apple's market share temporarily, and when both AT&T and Verizon expand to LTE/4G it gives Apple an additional bargaining chip.

As they say, if you're going to depend on luck, you better have a lot of it, and Apple did.

Look for Apple to extend its contract with AT&T for now, perhaps for an additional year beyond 2010 while LTE is sorted out. But don't let that lead us to believe that Apple doesn't have something up its sleeve with Verizon.