Verizon takes iPhone fight to AT&T

Verizon's launch of the iPhone will help it close the gap on AT&T in the US smartphone market, where AT&T has built a sizable lead largely due to the iPhone.
In fact in 3Q10 AT&T had more than twice as many smartphone subscriptions as Verizon, with 49 million compared to 20 million at Verizon, according to Informa Telecoms & Media data.
That is a huge gap particularly given that smartphone subscriptions are one of the key growth drivers for mobile operators - for example smartphone subscriptions at AT&T have 1.7 times the ARPU of non-smartphone subscriptions.

Although launching the iPhone is great news for Verizon in the long run it will hit margins this year, given the steep subsidies associated with the device.
The operator is likely to have to provide a subsidy of $300-400 for each iPhone, similar to AT&T's iPhone subsidy, which could lead to a subsidy bill of $3-4 billion if Verizon sells 10 million of the devices this year, which is likely.
But it is a price Verizon will be willing to pay to land millions of new, high-value smartphone subscriptions.

For Apple the CDMA iPhone means expanding availability of the device to a segment of the US mobile market that has been unwilling to leave Verizon.
The availability of the CDMA iPhone does put significant pressure on AT&T because it now has to compete with what it widely perceived as the best network in the country.
While the majority of AT&T iPhone customers are locked-in to lengthy contracts, the operator will have to battle fiercely for new iPhone customers as well as ensure those that can leave its network when their contracts run out don't.
It makes absolute sense for Apple to sell the iPhone through as many operators as possible because this increases the reach it has with the device. Apple has clearly benefited from this in the markets it has expanded the number of operators it sells to in Europe and Asia.
For instance, Vodafone UK sold 100,000 iPhones in just the first week of launch in 1Q10, while Orange UK sold 220,000 iPhones in the first quarter it offered the device in, in 4Q09, roughly two years after the device was first introduced in the market by O2.
This indicates that there is strong demand for the iPhone among customers of an operator who don't want to change carrier just to buy the iPhone.
However, Apple's strategy of expanding the number of markets it offers the device in has been executed in tandem with its release of newer versions of the device at the same time as offering older versions of the device at lower prices, which by itself is largely responsible for its increasing popularity.
For instance, Apple's global iPhone sales increased over 67% between 2Q10 and 3Q10 following the launch of the iPhone 4, at the same time as it expanded the number of operators it offers the device with, as well as offering older versions of the device at lower prices.
Meanwhile, we'll have to wait and see what the CDMA iPhone means for the various vendors that supply components for the device in the long term.
Apple is an expert at maximizing margins and it will not want these to be diluted by offering two versions of the same device. We will have better visibility on this when the components of the new iPhone become known.
Mike Roberts is a Principal Analyst at Informa Telecoms and Media