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'Complicated' Verizon iPhone deal said to be unlikely in 2010

 

Though Apple striking a deal with the largest wireless carrier in the U.S., Verizon, would be ideal, competitors T-Mobile and Sprint are more likely to carry the iPhone in 2010, one analyst believes.

With 89 million total customers, Verizon is the top prize in terms of the four major U.S. carriers. Apple is currently in an exclusive deal with the No. 2 carrier, AT&T, which has 82 million customers. But that agreement is believed by many to expire in 2010.

In a new note to investors Wednesday morning, analyst Shaw Wu with Kaufman Bros. said although many believe the iPhone will come to Verizon in 2010, it's likely wishful thinking. The problem, he said, is both Verizon and Apple have found success by focusing on "customer control." Their similarities are what he believes will keep them apart.

"Apple runs its own App Store and VZ has aspirations to do so," Wu said. "Apple controls the media experience with iTunes and VZ with its V CAST service. Moreover, Apple gets very favorable economics with an overall iPhone (average selling price) of $611 and at AT&T, we estimate it is higher at roughly $700. RIM, who is by far VZ's largest smart phone supplier, only has an ASP of $340. Palm's ASP is $436 and we estimate Motorola's Droid ASP is roughly $450."

Because Apple and Verizon have conflicting interests, Wu said he believes that a deal between the two companies would take longer than many currently expect. That would make a potential 2010 deal unlikely.

Instead, Wu said that Apple could strike deals with both Sprint, which has 48 million wireless subscribers, and T-Mobile, which has 33 million customers. Both companies are more likely to be agreeable with Apple's practices in order to offer the iPhone.

"While we believe VZ is likely inevitable at some point when 4G technology rolls out in 2012 or so, we believe Sprint and/or T-Mobile are more willing partners for Apple in helping maintain margins and customer controls," he said. "From a technology perspective, we believe T-Mobile may have an advantage with a similar 3G UMTS/WCDMA network as AT&T."

It's the second time this week an analyst has predicted Apple will jump to T-Mobile in 2010. In terms of technology, T-Mobile would be the simplest choice: Though carrier's high-speed 3G connectivity operates on a unique 1700MHz spectrum that is incompatible with the current iPhone, the addition of that frequency to a future hardware model would be much simpler than adding compatibility with Verizon or Sprint's CDMA networks.

Recent rumors have suggested Apple is working on an agreement with chip maker Qualcomm to add CDMA connectivity to a new iPhone in 2010. But both Verizon and Sprint use a technology that, unlike the GSM network of AT&T and T-Mobile, is not widely used abroad.

Another possibility noted by Wu: Apple could extend its contract with AT&T through 2011. The analyst said he believes AT&T's agreement ends in the summer of 2010, but a last-minute extension remains a possibility. Earlier this year, there were reports that AT&T was working to extend the contract with Apple for one more year.

Kaufman Bros. has reiterated its recommendation to buy AAPL stock. It has also maintained its price target of $235.