Droid to help Verizon narrow gap with AT&T

NEW YORK (Reuters) - Verizon Wireless is expected to have caught up a little with AT&T Inc in the race for new wireless subscribers, as momentum built behind Motorola Inc’s Droid smartphone in the fourth quarter.

A man takes a photo with a Motorola Milestone smartphone, sister phone to the Motorola Droid, during the 2010 International Consumer Electronics Show (CES) in Las Vegas, Nevada January 8, 2010. REUTERS/Steve Marcus

But thanks to Apple Inc’s iPhone and Inc’s Kindle e-reader, AT&T is still forecast to have added 1.8 million net new customers in the last three months of 2009, above Verizon Wireless’ 1.5 million, according to the average estimate from four analysts polled by Reuters.

Nonetheless, that is an improvement for Verizon from the third quarter, when AT&T’s 2 million additions far outpaced the 1.2 million at Verizon Wireless, a unit of Verizon Communications Inc and Vodafone Group Plc.

“You had AT&T with a huge quarter in Q3,” said Pacific Crest Securities analyst Steve Clement. But he added, “The momentum on the iPhone might be waning a bit. The Droid was successful for Verizon in the fourth quarter.”

Motorola is expected to sell more than a million Droid phones in the quarter, according to five analysts contacted by Reuters. While that is much smaller than forecasts for iPhone sales, it is still relatively big for a single phone.

Clement expects AT&T to have activated about 2.6 million iPhone customers in the quarter, down from the 3.2 million in the third quarter.

In terms of the valuable monthly bill-paying customers, known as postpaid subscribers, Verizon’s exclusive U.S. rights to the Droid helped it draw almost level with AT&T, the exclusive U.S. carrier for the iPhone, analysts say.

The average forecast is that Verizon added over 1 million net postpaid subscribers in the fourth quarter, compared to 1.1 million for AT&T.


Both AT&T and Verizon have been expanding into new areas for growth as most people already own cellphones.

For example, the Kindle e-reader is seen adding as many as 500,000 new customers to AT&T, according to analysts.

Verizon Wireless is seen adding as many as 450,000 new users to its network from an unlimited prepaid service on Tracfone, an America Movil unit that rents capacity from Verizon and sells its service in Wal-Mart Stores Inc outlets.

Analysts see prepaid services and devices like Kindle as increasingly important for customer growth, even though they bring less average monthly revenue per user (ARPU).

“Growth in the industry going forward will be much more weighted toward prepaid and wholesale, therefore industry ARPU will go down,” said Jefferies & Co analyst Jonathan Schildkraut.

But since carriers don’t pay subsidies for prepaid phones or devices like e-readers, they still could help margins.

“If you back out the subsidy piece of the story, probably from the margin perspective it’s pretty good, potentially in line with traditional phone subscribers,” Schildkraut said.

Analysts expect heavy marketing expenses for the Droid, which uses Google Inc’s Android software, to have cut into Verizon Wireless’s profit margin in the quarter.

The biggest U.S. mobile service is expected to report a fall in its mobile service profit margin, before certain items, to 45.4 percent for the fourth quarter from 47.2 percent in the year-ago quarter and 46 percent in the 2009 third quarter, according to four analysts contacted by Reuters.

In comparison, AT&T’s profit margin is seen increasing to 39.2 percent, from 35.8 percent in the year-ago quarter and 38.5 percent in the third quarter, according analysts.

Operators have long depended on cool devices to attract new customers but the focus may change this year as AT&T is widely expected to lose its U.S. exclusivity contract for iPhone, Schildkraut said.

“We think we’re going to get to handset parity. This will return focus to network reliability,” he said, noting that this could mean rougher waters for AT&T as it has faced complaints from customers for network quality in some markets.

Reporting by Sinead Carew; Editing by Richard Chang