Verizon iPhone Talks Resurface

Highlights include Verizon Communications, Inc. (VZ), Vodafone Group, Plc (VOD), AT&T, Inc. (T), Deutsche Telekom AG (DT) and Palm, Inc. (PALM).

Both Verizon Wireless (VZ) (Verizon owns 45% and Vodafone [VOD] owns 55%) and AT&T (T) have announced their quarterly results, and the rumor of a joint iPhone and Verizon Wireless deal has resurfaced.

Wireless revenue at AT&T grew 39% to $3.2 billion, and net wireless subscribers grew by 1.2 million. This growth was due to the sale of 1.6 million iPhone activations and the increase in data service revenue needed by most users of the iPhone (if you want to surf the web you need a data service contract).

Verizon Wireless added 1.3 million net subscribers plus those added from the Alltel acquisition. Verizon had 19.3 million smartphone subscribers at the end of the quarter, and smartphone and PDA sales accounted for 41% of direct device sales.

With the strength of Verizon Wireless on a worldwide basis, the rumors of Verizon/Apple (AAPL) talks have resurfaced. It has been said that Verizon was one of the original group of companies that Apple talked to about the launch of the iPhone but that the talks stalled due to the terms that Apple asked for (revenue sharing and sale price of the device). There are a number of factors that impact a Verizon deal.

One factor was that there are two major technologies for cellular transmission -- Code Division Multiple Access (CDMA) and Global Service Mobile (GSM). The iPhone is a GSM device. According to sellers of worldwide phone services, there are 170 countries that use GSM technology, and you can buy a Subscriber Identity Module (SIM) card with a cell number and cell time in all of them for use in an unlocked phone.

You can use an iPhone anywhere a GSM network is available, but you can’t buy an iPhone from anyone but AT&T. CDMA technology is used in the US (except for AT&T and T-Mobile [DT]) and in Korea (which has no GSM service). Verizon uses CDMA technology and has the largest data infrastructure in the USA.

China, the largest subscriber base in the world, uses both CDMA and GSM.

Another factor is that AT&T does not sell the iPhone on a worldwide basis, and the phone is tied to an AT&T contract (except in the black market). This limits iPhone sales overall until AT&T’s exclusive contract ends next year.

Other points:

• Most of the world sells service and phones on a separate basis. You pay market price for a phone and buy time from a service provider.   
• The iPhone is not cheap, selling for $499 or more. Apple has a history of being reluctant in entering a commodity market and selling based on price. Apple would have to have made two versions or a dual version (I do not know of a cell phone that has both CDMA and GSM capability), one for CDMA (which would compete with AT&T) and the GSM version.   
• The AT&T deal ends in 2010, so no other contract will occur before that. Apple will release its new iPhone this June with its new operating system.   
• New smartphones with better features, such as the Pre from Palm (PALM), will be in the market over the next year, and I am sure that Apple will enhance its operating system again in 2010.

What are the benefits of a Verizon Wireless deal? It at least doubles Apple’s potential market in one fell swoop. Vodafone then enters the picture which extends the market into Europe. A new CDMA phone allows Apple to introduce a new competitor for other feature-rich smartphones.

But nothing happens until 2010.

Read the full analyst report on VZ

Read the full analyst report on VOD

Read the full analyst report on T

Read the full analyst report on AAPL

Read the full analyst report on DT