Why Apple’s iPhone is still not coming to Verizon
October 30th, 2009
Daniel Eran Dilger
A number of pundits and other wags keep insisting that Apple desperately needs to sell the iPhone through Verizon, and will likely do so sometime really soon now, providing AT&T haters and Verizon family plan users with empty hope. They’re still wrong, here’s why.
[Consider new information in a report that indicates Apple is building a hybrid CDMA/UMTS iPhone for 2010.]
I outlined a series of reasons why Verizon wasn’t going to get a CDMA iPhone just a few months ago (hint: CDMA is a non-starter). Verizon’s future LTE network (a major new upgrade of 3GPP UMTS, rather than Verizon’s current Qualcomm CDMA/EVDO technology) won’t help for the next year to two, because there won’t be enough LTE deployed to support a next-generation UMTS/LTE iPhone (which is certainly in the works but probably won’t arrive until 2011 at the earliest).
Verizon’s own initial LTE phones will be designed to fall back to CDMA in areas where LTE isn’t yet available. That means Apple’s non-CDMA LTE phones wouldn’t be acceptable on Verizon’s network for years until Verizon finishes its build out of LTE; Apple is not going to build a hybrid CDMA/LTE phone for Verizon for the same reasons it didn’t produce a CDMA phone for the company. Sometime around 2012 an LTE iPhone might become available for use on Verizon’s fleshed out LTE network, but that’s a long ways off… like Mac OS X 10.8 Lioness or iPhone 6.0 or Windows 7 SP 2.
This CDMA/GSM monumental technological deal breaker hasn’t stopped pundits from insisting that Apple desperately needs Verizon so that it can sell more iPhones. They seem to figure that if the iPhone were magically available for Verizon, Apple would only add new subscribers among Verizon’s members. Of course Apple would, but the other problem is that Apple would lose all its bargaining power with AT&T, not to mention all the airplay it gets as being the reason AT&T is growing and remaining competitive with Verizon, or the co-advertising and subsidies AT&T pays to keep Apple around.
What would a Verizon iPhone do for Apple’s sales?
We can do a little thought experiment to see how much of a difference it would make for Apple to sell the iPhone on Verizon. Let’s pretend the iPhone is RIM’s BlackBerry, which already sells in versions for both Verizon and AT&T, as well as for Sprint and T-Mobile, too. In fact, the BlackBerry is pretty much available everywhere. How has this worked out?
RIM sold a whopping 8.3 million BlackBerrys in its most recent quarter ending in September, and the company says it now has a subscriber base of 32 million users. Impressive!
Weak Q3 Sales May Lead To Lower Blackberry Prices | AHN
How does this compare to Apple, which only sells its iPhone in the US on AT&T’s global-savvy GSM/UMTS network? Apple sold 7.4 million iPhones in the same quarter, and it claims an installed base of 50 million iPhone and iPod touch devices, of which about 30 million are iPhones. Hmm.
Apple’s App Store Downloads Top Two Billion
Hold on a second I need to say that again
As Steve Jobs might say, “Yes, it’s true.” RIM sells BlackBerry through every major mobile carrier in the US. Apple has one carrier: AT&T, which represents roughly a third of American subscribers (78 million). Verizon claims 89 million, Sprint 49.3 million and T-Mobile 33.5 million. That’s about 250 million total American mobile subscribers represented by the top four carriers, and AT&T serves around 31% of them. Is it logical to think that if Apple developed unique versions of the iPhone to work on Verizon and Sprint that iPhone sales would triple? No, that’s not true.
Should Apple develop a unique CDMA or LTE/CDMA model to address Verizon’s 89 million subscriber base? Well look at the risks involved: while the iPhone might claim a significant percentage of Verizon’s minority of smartphone subscribers, any gains on that network would largely come at AT&T’s expense. Apple has a partnership with AT&T and a rivalry of sorts with Verizon, which has historically partnered with Microsoft. Why would Apple punish its partner to help out a company that initially rejected it, badmouthed it for years, and still adamantly refuses to give up its VCast junkware or support iTunes, even if Apple were open to creating an iPhone for Verizon?
Unlike other countries where Apple works with multiple subscribers, the US has a technology rift between GSM/UMTS and CDMA/EVDO. So adding Verizon as a provider wouldn’t simply be a matter of signing up a new provider but would also involve designing a new version of the iPhone, one that would introduce a complicated new set of missing features into its lineup. The other problem: Apple already has a way to get Verizon subscribers’ money: the iPod touch.
The T-Mobile option
It might make some sense for Apple to attempt to expand the iPhone’s US market reach and increase carrier competition by creating a new iPhone capable of using T-Mobile’s slightly different 3G UMTS network (current versions of the iPhone are only compatible with T-Mobile’s slower 2G GSM towers). That would allow the company to expand (rather than cannibalize) its AT&T business, as T-Mobile is more of niche provider with cheaper plans targeting different kinds of customers. And the limited drift from AT&T to T-Mobile wouldn’t impact AT&T nearly as adversely as a wholesale iPhone migration to its larger arch rival Verizon.
T-Mobile is just as desperate for new customers (particularly since Microsoft/Danger destroyed its Sidekick business by allowing a month-long cloud services failure), so it’s likely to be willing to offer Apple the same concessions as AT&T did (and which Verizon refused and refuses). Additionally, the work involved in making the iPhone compatible with T-Mobile is much less complicated and wouldn’t result in two models, one that only works in the US (CDMA) and another that works here and worldwide (GSM/CDMA). A single new UMTS iPhone that works on both AT&T and T-Mobile would also work globally, but no quad band 850/1700/1900/2100 UMTS phones exist yet anywhere.
Since this new UMTS iPhone would still be a UMTS phone, it wouldn’t have to drop major features Apple has long associated with the iPhone: the ability to talk on the phone while browsing the web to search for seafood restaurants in the Marina, or the capacity to effortlessly add, hold or drop multiple parties in the same conference call. CDMA phones from Verizon can’t do(roid) either of those things; data services like the web are dead when you’re on a CDMA voice conversation.
Verizon can simply hide this feature lapse on its own phones (like the new Android Droid), but it would be rather overtly problematic for Apple to have to explain to users that some iPhone features didn’t work on a specific carrier’s network. Recall the mass hysteria that resulted from iPhone 3.0′s MMS and tethering features going unsupported by AT&T and other providers. People make excuses for Verizon and Android and Symbian and Windows Mobile, but they don’t make excuses for Apple; they file class action lawsuits.
In addition to the overt problems with creating a special phone just for Verizon (having to design, test and maintain two SKUs worldwide; diverting all its goodwill with AT&T to a rival willing to offer much less; lost features and product confusion), there’s also another blockbuster reason for Apple to ignore Verizon. It’s called opportunity cost.
Why would Apple spend its finite resources and time developing a CDMA or even CDMA/LTE version of the iPhone to reach 89 million customers, the vast majority of whom are not even smartphone buyers and have the option already to switch to AT&T (which also helps advertise the allure of the iPhone and strengthens Apple’s bargaining position with AT&T), when it can instead work on deals like selling the iPhone to China Unicom’s 170 million customers?
Additionally, there are many secondary or tertiary providers around the world in countries where everyone sells GSM/UMTS phones that Apple can use to expand its competitive reach without developing a new handset and licensing and testing completely different technology. Many of these offer far greater “low hanging fruit” opportunities than a Verizon partnership in the US.
Remember too that all the work Apple would go through to develop a CDMA phone will become obsolete in just a couple years. Verizon certainly isn’t going to shut down its CDMA network, but by 2012 there will be no CDMA smartphones competing for the iPhone’s position. They’ll all be LTE phones. LTE will make CDMA look like 3G makes GPRS look today. Again, as the entire world moves toward LTE, Apple will eventually migrate to LTE and at some point be able to offer a phone that works across both AT&T and Verizon in the US. But that’s still many years away.
Why the Verizon iPhone idea won’t go away
The reason why pundits are hot to trot for a Verizon iPhone are pretty simple. First, shill pundits need to keep raising the prospect to make it seem like Verizon’s existing customers should just stay put and wait it out, perhaps buying another phone while they wait. The market manipulation pundits use this rumor as a tool to suggest potential for Verizon or to cast shadows of uncertainty on Apple (as in, oh beleaguered Apple could be matching RIM’s fantastic sales if only it sold the iPhone like RIM sold its BlackBerrys… err).
But the main reason everyone else likes the prospect of a Verizon iPhone is based on the terrible experience they’ve had with AT&T, which they compare to Verizon’s stronger 3G bars in more locations. Verizon does have an older, more established EVDO 3G network compared to AT&T, which has only pieced together its national UMTS network quite recently. However, a Verizon iPhone would have the same impact on that network as the current iPhone has had on AT&T.
And if you look at how much of the world’s mobile traffic is associated with the iPhone (50%) compared to the iPhone’s actual market share in units sold (2.5%), it’s not hard to deduce that a Verizon iPhone with similar adoption rates to AT&T would obliterate Verizon’s network just as handily. The only way it wouldn’t is if Verizon maintained its user-hostile restrictions on data: extra fees for GPS services, extra fees on media downloads and ringtones, and forced sales of VCast junk instead of the ability to get mobile apps and content from iTunes. And if you couldn’t use the data network to do the things you wanted to do, it wouldn’t really help to just have it available in a technical sense. After all, if you’re stuck having to find a WiFi spot for data, you might as well buy an iPod touch instead.
Why do other companies have no problem selling GSM and CDMA phones?
Okay, so RIM isn’t selling significantly more BlackBerrys than the iPhone, despite having lots of models on all carriers and all technologies. But doesn’t this suggest that it’s not really that hard to develop multiple handsets and work with different carriers, and that Apple might be able to do even better than RIM if it were? After all, Motorola, Palm, LG, Samsung and even Nokia are all making CDMA handsets. Before the iPhone, pretty much all the desirable phones in the US market were offered on CDMA first, if not exclusively (with the Sidekick being a notable exception).
Well, consider that Apple has been in the smartphone business for just over 28 months. RIM and the others have been selling phones for at least a decade. Building business and technical relationships with carriers and chipset vendors takes time. AT&T was the only mobile operator to take Apple seriously, and was willing to do so because it was desperate for a signature phone, the same way Verizon, Sprint and T-Mobile all are desperate today in the wake of the iPhone.
If Verizon had welcomed Apple into the market, things might likely have been different. But look too at recent successes and failures. While the Palm Pre hasn’t set any records, it has entered the market and helped reverse Palm’s free fall. Palm, like Apple, introduced its phone with one carrier and one technology: Sprint and CDMA/EVDO in Palm’s case. This will allow Palm to sell the Pre to Verizon next year using the same phone, increasing its potential market reach from just under 50 million to almost 140 million subscribers.
The Pre can’t sell globally as a CDMA phone, so Palm had to develop a GSM/UMTS version for Europe and Asia, which is expected to reach consumers by the end of the year. In contrast, by the end of its first year the iPhone had extended its reach from AT&T’s 70+ million base to hundreds of millions of subscribers worldwide using the same global model. Despite having a glorious past as a smartphone leader, Palm was nearly starting out from zero due to dropping the ball on the Treo. That makes its experiences with the Pre comparable to Apple, which launched its iPhone from scratch two years earlier. Yet Apple is selling like mad while Palm is still struggling to complete two different models despite meager sales. Apple’s strategy seems to have worked better (I won’t even get into Palm’s invisible Pixi).
Now consider Microsoft’s Pink. Like Palm, Microsoft has a faded past that gives it an edge over Apple in terms of experience in the mobile industry. Yet Microsoft chose to deliver two different models on two different technologies at once, and ended up falling far behind in its launch plans. Now Pink is uncertain to launch at all, and will be far behind the iPhone 3GS even if it does manage to get anything delivered next year. This certainly lends support to the idea that Apple’s single vendor / global technology strategy was much better planned and orchestrated.
The path less traveled
Another thing to consider is that Apple doesn’t follow the rest of the industry. It didn’t chase Acer, Dell and HP into the swamps of low profit, low powered netbooks, which buoyed PC volumes while creating unsustainable margins. Instead, it designed premium MacBooks and iMacs and sold record numbers of them, which helped sustain new sales growth records while the rest of the PC industry plateaued or actually shrank and as profits plummeted.
In mobile phones, Apple is also doing something that none of the top five are: exclusively selling smartphones. Nokia sells vast numbers of phones, but most of them are all cheap ‘feature phones’ that don’t do much, aren’t very profitable, and like PCs aren’t growing anymore. Nokia has multiple platforms: its own embedded OS, Symbian, and now Maemo Linux. LG and Samsung are also trying to cover all the bases, with Android, Windows Mobile, Symbian, and embedded software of their own.
Most other phone makers are all attempting to sell their phones on every platform and provider, anywhere they can. This is largely because they serve as pawns for the mobile providers, who often dictate what features they can sell and at what prices. That’s why smartphones and useful data networks were so slow to take off in the US: powerful mobile operators decreed what they thought consumers would buy, just like a Supreme Soviet.
Apple shook up the smartphone market with fresh competition and set off a wave of copycats. This was only possible because of Apple’s leverage with AT&T. Had it instead copied the Motorolas and Sony Ericssons of the world (which Apple formerly partnered with in trying to introduce iTunes-savvy phones) and introduced a half dozen cheap phones designed to hit every price point while negotiating with all of the mobile providers in the US, it would not have fared any better than those losers.
It would have to have made the same concessions to sell devices in Sprint’s and Verizon’s stores (including Radio Shack), including agreeing to sell VCast junkware and $3 ringtones, and would never have been able to introduce a universal App Store for its users. This iPhone phenomenon would never have happened.
Two and a half years later, Apple’s standout success with its single US provider and its global strategy via one mobile technology makes any mention of jumping ship to Verizon a very poorly thought out fantasy. Fortunately for the iPhone, the strategy not only worked (Apple’s couple of percentage points of market share were recently estimated to be gobbling up 32% of the entire industry’s profits in the first half of 2009, and that was before the blockbuster iPhone 3GS launch) but also scorched the earth behind it, preventing anyone else from really being able to copy it.
Android is now trying to cover all the bases in the same old model of Windows Mobile, resulting in a fractured platform that consumers won’t even be able to readily identify. Palm is proving that carrier exclusivity alone isn’t a silver bullet. And RIM’s Storm is proving that cloning the iPhone’s form factor doesn’t result in wild success when the majority of its user base really just wants a basic PDA/texting phone.
Meanwhile, Apple has outrun a series of Android attempts, sucked the wind from the Pre’s sails, and is catching up to America’s most popular smartphone from Canada while only using one provider to achieve those sales in the US. It’s no surprise Verizon is interested in getting the iPhone, it’s just still a bit of a puzzle why pundits think this would do Apple any good.