Apple using iPhone to play AT&T against Verizon?

NEW YORK/SAN FRANCISCO Wed Apr 29, 2009 10:50am EDT

A customer shows the ''iPhone 3G'' after buying it at an outlet in New Delhi August 22, 2008. REUTERS/Adnan Abidi

A customer shows the ''iPhone 3G'' after buying it at an outlet in New Delhi August 22, 2008.

Credit: Reuters/Adnan Abidi

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NEW YORK/SAN FRANCISCO (Reuters) - Apple Inc (AAPL.O) appears to be playing the top two U.S. mobile operators AT&T Inc (T.N) and Verizon Wireless against each other as it shops for the next distributor for its popular iPhone.

Whether one or both operators sign a deal, analysts are in no doubt that Apple wins in the end.

Apple has an exclusive and very lucrative deal with AT&T -- believed to run into 2010 -- to carry the iPhone on its Global Service Mobile (GSM) network. Research firm iSuppli estimates that Apple earns a profit margin of more than 50 percent for iPhone.

But Lowell McAdam, the head of Verizon Wireless, recently spoke with Apple Chief Executive Steve Jobs and senior Apple executives about wireless devices, said a spokesperson for Verizon Wireless, a joint venture between Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L).

The spokesperson declined to discuss what devices the executives discussed, or when they might hit the market, but several media outlets have reported that Apple is talking with Verizon about carrying an iPhone on its network.

"It makes sense for Apple to spread the love to Verizon and it makes sense for Verizon to have iPhone and it makes sense for AT&T to make sure that doesn't happen," said Roger Entner, the head of telecom research at Nielsen.

"The winner is Apple either way," he said.

Adding Verizon as a carrier could more than double Apple's current addressable market; AT&T has about 78.2 million wireless customers, while Verizon has 86.6 million, according to their most recent quarterly reports.

But AT&T, which had 1.6 million new iPhone activations in the first quarter this year, is expected to fight tooth and nail to keep its iPhone exclusivity.

AT&T already sells iPhone for as little as $199 after paying a huge subsidy to Apple to boost sales. The iPhone has helped boost AT&T's subscriber numbers and data service revenue in a slowing market, where most people already have mobiles.

Apple has said it has little interest in offering a phone for Verizon's Code Division Multiple Access (CDMA) network, which is available in much fewer countries than the rival GSM standard AT&T uses.

"Verizon is on CDMA and we chose from the beginning of the iPhone to focus on one phone for the whole of the world," Chief Operating Officer Tim Cook said on Apple's quarterly earnings conference call last week. "And when you do that, you really go down the GSM route."

However, Verizon Wireless plans this year to start building a new network based on LTE, an emerging high-speed wireless technology that is expected to be eventually widely adopted by other operators around the world.

BARGAINING TACTICS

Apple is widely expected to release a new iPhone later this year, along with some sort of small touch-screen computer.

The smartphone market is expected to see continued growth in 2009, even as the overall handset markets continues to slip. Research group iSuppli expects smartphone shipments to rise as much as 11 percent this year to more than 190 million units.

The iPhone and its chief rival, Research in Motion's RIM.TO RIMM.O BlackBerry, will soon be joined in the market by Palm Inc's PALM.O much-anticipated Pre smartphone.

Analysts say Apple is talking to both AT&T and Verizon in an effort to strike the best deal it can once the AT&T agreement expires. "My 2 cents is that it's a negotiating tactic," said Collins Stewart analyst Ashok Kumar.

Broadpoint AmTech analyst Brian Marshall said Verizon subscribers represent a "huge untapped market" of subscribers that Apple may covet, but he also noted that Apple is famous for driving a hard bargain.

"Apple is one of the best negotiators out there, and at the end of the day they have the most compelling product so they're in a very strong bargaining position," he said.

Entner said AT&T may find it is asked to give up too much to Apple in order to convince it to not also sell the phone to Verizon. The steep subsidies had already pressured AT&T's earnings in recent quarters.

"The deck is heavily stacked against AT&T," said Entner. "Commercially it makes a lot of sense for Apple to do a deal with both companies."

One big question is whether Verizon Wireless would be willing to give the same level of control to a phone maker that AT&T has ceded to Apple. For example, software applications for the iPhone must be sold through Apple's App Store.

Verizon Wireless already has a mobile search agreement with Apple's arch-rival Microsoft Corp (MSFT.O) and the two are also collaborating on a touch-screen cell phone to rival iPhone, according to a report in the Wall Street Journal on Tuesday.

The report, which said this phone would be made by a third party manufacturer and hit the market early next year, cited unidentified people familiar with the situation. Verizon declined to comment on this story as did Microsoft.

Apple said it would not comment on rumors and reiterated its stance on CDMA. In a statement, spokeswoman Natalie Kerris also affirmed the company's support for AT&T.

"They have done a very good job with iPhone, putting the full force and weight of their company behind it. We're very happy with the relationship that we have and do not have a plan to change it," she said.

(Reporting by Sinead Carew and Gabriel Madway; Additional reporting by Bill Rigby in Seattle; Editing by Richard Chang)

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