The wireless industry is buzzing with rumors that Verizon Wireless, the largest U.S. mobile-phone company, will start selling Apple Inc‘s (AAPL) iPhone in January 2011. Verizon Wireless is a venture between Verizon Communications (VZ) and Vodafone Group Plc (VOD).
If the rumor proves true, AT&T Inc’s (T) exclusive hold on the iPhone will end, giving Apple an opportunity to expand the availability of the product through other mobile service providers. Several researchers estimate that Verizon’s release of the iPhone will drive Apple’s U.S. sales higher by at least 5 million units in 2011.
The anticipated alliance with Verzion Wireless will also provide Apple a stronger position over its rivals Research In Motion Ltd (RIMM) and Motorola Inc. (MOT), whose smartphones are currently promoted by Verzion Wireless. The availability of Apple’s iPhone through Verizon may drive down market share of Research In Motion, Motorola and Google Inc. (GOOG).
Verzon’s biggest rival AT&T is the leader in selling iPhone in the U.S. since June 2007. The iPhone facilitated AT&T by adding more subscribers even when the U.S. mobile-phone market was nearing saturation. In the first quarter of 2010, AT&T added 1.9 million subscribers, reaching 87 million total subscribers, up 11.2% year over year, driven by increased smartphone penetration (especially iPhone) and healthy adoption of connected devices. This represents the largest first-quarter net addition in the history of AT&T.
However, while iPhones are delivering strong growth momentum, high marketing costs associated with the products (especially due to the heavy subsidy associated with iPhone 3G/3GS) have been affecting AT&T’s earnings. AT&T is currently paying a hefty subsidy of approximately $300 per phone to Apple, which is dilutive to the company’s earnings.
Verizon is involved in an increasingly expensive promotional campaign against AT&T to aggressively position its newly launched Droid against AT&T’s iPhone. The opportunity to sell iPhones will provide a significant impetus for Verizon to boost its bottom line.
Gross subscriber additions at Verizon Wireless remain strong and the monthly churn rate (customer switch to competitor) is one of the lowest in the industry. Expansion of FiOS services remains an integral part of Verizon’s long-term growth strategy. Increased market penetration of the FiOS footprint and the roll-out of the 4G Long-Term Evolution service (planned for fourth quarter 2010) are expected to strengthen Verizon’s market position.
We are currently maintaining our long-term Neutral recommendation for Verizon. However, we expect the stock to under perform in the short term, due to its intense competition with AT&T, and thereby recommend our Sell rating with the Zacks Rank of #4.
We are currently maintaining our Neutral recommendation on AT&T with Zacks Rank of #3 (Hold). For Apple, we recommend an Outperform rating with Zacks Rank of #1 (Buy).
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