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January 11, 2011

Comments on VZW iPhone Announcement
As a snowstorm heads toward the east coast, will the Verizon iPhone be the winter of AT&T's discontent?

Actually, the announcement today was a bit anti-climactic, in part because it has been rumored for so long, has been written about to death...and most importantly because there is nothing particularly new about the product. It was symbolic that this was a Verizon event, not an Apple event; New York, not Bay Area; and that Tim Cook, rather than Steve Jobs, represented Apple. Yes, Verizon is now carrying the iPhone, but Apple has not conferred MFN status on anyone.

Here's my initial analysis. Also, click here to see the interview I did earlier today on Bloomberg TV.

So, Why is This Interesting?

Clearly, Verizon Wireless, with 90+ million subscribers, will be be a huge boon to iPhone sales, and there is pent-up demand for the device on Verizon's network. It is possible that 10-20% of Verizon's base has been either holding off on a smartphone purchase or delayed upgrading an aging Blackberry or Android device because they have been waiting for the iPhone on Verizon's network. And surveys have reported that some 25% of AT&T's iPhone base would consider switching to Verizon.

There Will Not be a Tidal Wave

If the mid-point of forecasts -- about 10 million -- VZW iPhones are sold this year, it will happen gradually. In part because switchers from AT&T and other operators are at some point in their contract -- and the VZW version of the device is not so unique or special that a lot of subscribers will eat a big portion of their early termination fee (ETF).

VZW will also resist offering huge incentives -- such as "buying out" contracts from subscribers on other operators' networks -- because they have no huge desire to dramatically increase their up-front subscriber acquisition costs.

The Case is Not As Compelling as it Was A Year Ago

Important as this is for subscribers and the industry, Verizon's having the iPhone will not have as dramatic an impact as it might have even a year ago. Why?
  • There is nothing particularly different about the VZW iPhone. So the main reason to get a VZW iPhone is if you are an existing Verizon subscriber who has been waiting for one or if you have been dissatisfied with your experience on AT&T's network.
  • Not everything "network" favors Verizon. At its best, an iPhone on AT&T's HSPA+ network will be faster than on Verizon's EV-DO network. Additionally, one cannot use both voice and data simultaneously on Verizon's network -- something that AT&T is likely to play up in its marketing. And AT&T has made steady improvements to its network in the past year. That said, Verizon's network is still more reliable, its 3G coverage markedly better than AT&T's, and Verizon has prepared very well to handle the capacity demands of smartphones.
  • Competing devices have improved. Today's top-of-the-line Android devices are competitive with the iPhone in just about all respects. The delta between iPhone and other smartphones has narrowed significantly in the past year. Even though the iPhone's user interface (UI) is better, the experience of integrating with iTunes smoother, and there are 300,000+ apps, there is nothing mission critical that you can do on an iPhone that you can't do on an Android device.
  • Verizon is still paying lots of attention to Android. If it was gonna be "all iPhone, all the time" at Verizon, they wouldn't be putting the effort they are into Android. Verizon expended huge resources and marketing effort on CES last week, and the upcoming lineup of 4G devices features primarily Android.  Plus, they can't forget their huge base of Blackberry subs, particularly in the enterprise. Many IT departments are not yet ready to embrace iPhone or Android (although they're getting there).
How Will They Battle This Out?

The battle lines for 2011 are drawn. AT&T has had 3+ years to anticipate this moment. Their re-christening of their 3G+ network (AKA HSPA+) as 4G was a smart marketing ploy, especially since Verizon's iPhone will be using the CDMA network for the time being. AT&T will emphasize the speed of its network being superior to CDMA, and the fact that users can do both voice and data simultaneously -- a not insignificant advantage.

As a broader marketing message, AT&T will emphasize the breadth of its smartphone lineup. It is the only operator to support all major smartphone OSs. AT&T will certainly pour more marketing resources into Android, Windows Mobile, and Blackberry. It will also have to do a better job of explaining to users the merits of each device and do some more intelligent segment marketing.  

On Verizon's side, expect the main marketing message to be around "the iPhone, now on the best network" -- not unlike the messaging they have been using for the iPad. Introducing the iPhone with an unlimited price plan is an effort to differentiate, and, more importantly, sends a strong signal to users and the market that the "network" is ready to handle the demand.

How the operators handle upgrade and ETF policies will have an important bearing on how this plays out. Verizon is likely to offer early upgrade opportunities for existing subscribers, as long as they sign a new two-year agreement. Don't expect them to be overly aggressive, since they are already taking a significant hit from the iPhone subsidy.

AT&T might counterpunch this summer if the initial version of the iPhone 5 is of an HSPA+ variety rather than CDMA or LTE (ie. Verizon ready). AT&T could offer aggressive upgrade or switching incentives in order to attract customers, particularly if Verizon starts taking inordinate share of iPhone adds over the next few months. 

What Will This Mean for Other Handset OEMs?

The biggest hit on the other OEMs will be on the marketing side. Verizon has been instrumental in helping to "make" Android, pumping hundreds of millions of dollars into marketing Android devices. Where would Motorola be today without Verizon? Android will lose some of Verizon's marketing muscle, but other operators, notably AT&T and Sprint, will divert more resources to Android and other platforms. The signature Android devices in 2011 will be those on LTE, and that will be one way of differentiating Android from iPhone. The Android ecosystem will be under greater pressure, but the pace of innovation from Google and the OEMs has been impressive.

I am a little more concerned for RIM. They are not keeping pace with the innovation acceleration we've been seeing on iOS and Android. And more enterprise decision makers are starting to support iOS and Android. Even the Playbook, much anticipated by RIM's base and the enterprise community, won't be available (in cellular version) until this summer -- and by then we'll have numerous (too many?) other tablets to choose from, given what was announced at CES.

What's Next?

The biggest takeaway of today's announcement: users have tremendous choice, and operators have less control than they ever have before.

As for the Verizon iPhone, it's an important step in their relationship with Apple. Verizon's strength, in addition to its network, has always been in operations and execution. This is likely to impress Apple, which is no small micromanager in its own right.

Of course, the killer device would have been a combo CDMA-LTE iPhone. As Verizon rolls out LTE to the majority of its footprint throughout 2011, an LTE iPhone could arrive sooner than you think.
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