The Ideal Carrier For The iPhone

The upcoming end of iPhone exclusivity on the AT&T network is bound to change the equation in the carrier industry. According to Shaw Wu with Kaufman Bros., details are being worked out for a Verizon iPhone and that it would be “premature” to rule out T-Mobile and Sprint. In an earlier note, Wu said that T-Mobile USA is the most likely candidate given that it uses similar cellular technology as AT&T. Also, T-Mobile needs the iPhone more than Verizon does, but it seems that Apple needs Verizon more than any other carrier. Let’s take a closer look.

Wu says that while the iPhone will eventually come to Verizon, it might be delayed if Apple chooses to go with T-Mobile or Sprint. Verizon might get the iPhone as late as 2012 instead of January 2011. Verizon is said to be in talks with Apple for a “SVDO” iPhone which would allow both voice and data at the same time.

The iPhone is available only on AT&T, which does not have a great network. AT&T is handling much more data traffic than the other carriers due to the extensive use of iPhones and iPads, and as a result its quality of service has suffered. With the iPhone on other carriers, AT&T’s network could also be less congested.

Verizon (NYSE:VZ), with annual revenue of $107.8 billion, reported second quarter revenue of $26.8 billion, down 0.3%. Net loss was $0.07 per share compared to a EPS of $0.52 per share last year. The company added 1.4 million net subscribers to reach a subscriber base of 92.1 million. It has the lowest churn in the industry at 0.94%. Its net debt was $52.7 million at the end of the quarter. Q1 coverage is available here. I am a Verizon user and have been observing AT&T’s service quality problem for years.

AT&T (NYSE:T), with annual revenue of $123 billion, reported second quarter revenue of $30.8 billion, up 0.6% y-o-y and 0.9% q-o-q. Net income was $4 billion or $0.68 per share up 26% compared to $3.2 billion or $0.54 per share last year. The company added 1.6 million subscribers to reach 90.1 million in service. Its postpaid churn improved from 1.15% last year to reach a company record of 1.01%. The number of postpaid 3G integrated devices on its network increased by 2.9 million to 29.7 million, an increase of 98.2% y-o-y and 10.8% q-o-q. Q1 coverage is available here.

On June 24, AT&T began offering iPhone 4, which saw record preorder sales. For the full second quarter, AT&T iPhone activations totaled 3.2 million, 27% of which were from new customers. When the new iPhone was launched, AT&T reported that 40% of its activations came from new customers. Growth for the iPhone on the AT&T network is reaching the saturation point, and Apple should be looking forward to ending its exclusive relationship with AT&T. Apple will also be dealing with the Android threat by providing the iPhone on other carriers. Android phones are gaining momentum right now because they are available on more carriers than the iPhone. AT&T is trading around $27 with market cap of about $162 billion. It hit a 52-week high of $28.73 on January 5. Verizon is trading around $30 with market cap of about $85 billion. It hit a 52-week low of $25.99 on July 7.

Sprint (NYSE:S) with annual revenue of $32.3 billion, reported second quarter revenue of $8 billion, down 1%. Net loss was $760 million or $0.25 per share, and the company ended the quarter with about $4.3 billion in cash. It gained 111,000 net subscribers in the quarters driven by the success of HTC EVO 4G and BlackBerry Curve. Its total subscriber base now stands at 48.2 million subscribers. Churn was 1.85% vs. 2.05% last year and 2.15% last quarter.

Sprint recently released its second 4G device, the Samsung Epic 4G running on Android 2.1 and the only Galaxy S variant to include a physical QWERTY keyboard. Sprint says that it became one of Sprint’s best-selling devices for first-day sales. It is trading around $4 with market cap of about $13 billion. It hit a 52-week high of $5.31 on May 25.

Joann S. Lublin and Spencer E. Ante of the Wall Street Journal recently reported that the board of Sprint is debating whether to let rival cellphone operator T-Mobile USA invest in its joint venture, Clearwire. Sprint invested $1.2 billion in Clearwire in 2009, but more funding is required to expand its network from forty-nine U.S. cities to the entire country. Other investors in Clearwire’s WiMax 4G technology include Intel, Comcast, Time Warner, and Bright House Networks.

Sprint is the only 4G network in the country, but Verizon expects to launch its 4G network in twenty-five to thirty cities by the end of the year, while AT&T plans to roll out its 4G network next year. T-Mobile has yet to make any plans for a 4G network but recently upgraded to a faster 3Gnetwork, HSPA+. My analysis of the 4G race in the carrier industry is available here.

T-Mobile USA, which was first to launch the Android OS, reported second quarter revenue of $5.36 billion, up from $5.28 billion in Q1 2010 and $5.34 billion last year. Net income was $404 million, down from $425 million last year. The company continued to lose customers: it lost 93,000 in the quarter, compared to 77,000 customers lost in the first quarter and 325,000 added last year. Its total subscriber base stands at 33.6 million. Churn was constant at 2.2%, but prepaid churn increased to 7.6%. About 6.5 million customers on T-Mobile USA’s network use 3G-capable smart phones, up 25% from last quarter and more than tripling from 2.1 million customers last year.

Verizon is riding high on the momentum of the Android OS. It has six devices based on the Android OS, including Droid. However, as the iPhone becomes available on other networks, interest in Android phones may wane. According to Morpace Omnibus’s poll of 1,000 American consumers, more than half of Verizon customers want an iPhone, and 23% of AT&T customers, 22% of Sprint customers, and 20% of T-Mobile customers would also go for a Verizon iPhone. That is support for the argument that the ideal carrier for the iPhone is Verizon.