Will iPhone 5 Drive Wireless Growth?

In a technology driven world, it has become a prerequisite for the telecom carriers to upgrade themselves lest they fall behind. Future growth of the telecom industry, dominated by the U.S., depends on the wireless segment as subscribers are discontinuing landlines and moving to wireless connections.

This has become more obvious with the launch of Apple Inc.’s (AAPL - Analyst Report) hot iconic iPhone 5 on Wednesday. The top three U.S. telecom operators - Verizon Communications Inc. (VZ - Analyst Report), AT&T Inc. (T - Analyst Report) and Sprint Nextel Corp. (S - Analyst Report) – will offer iPhone 5 on its 4G LTE networks starting from September 21. Besides, the low-cost wireless service provider Leap Wireless International Inc. (LEAP - Analyst Report) will also offer iPhone 5 from September 28.

The product will be available at $199.99 for the 16 GB model, $299.99 for the 32 GB model and $399.99 for the 64 GB model with a new two-year contract.

We expect the demand for this new device would ride high, as it is the first iPhone that supports the new high-speed 4G LTE network. Though the iPhone 5 is likely to be the most popular product, there is no guarantee that it would be profitable in the short term for the U.S. carriers owing to lofty subsidies. In fact, subsides might outweigh other benefits from the product like customer additions and higher average revenue per user.

All said, the iPhone 5 might act as a major catalyst and signal a new wave in the wireless growth story this year.

If we go by the iPhone history, AT&T has been the major beneficiary from the iPhones, generating higher revenues than its competitors. However, this advantage might erode due to shared data plans and new upgrade policy. The company is also racing with Verizon Wireless in deploying LTE services, which is currently available in more than 60 markets and is expected to reach 100 by the end of the year.

Verizon might emerge as a strong winner for the iPhone 5 due to its leading position in LTE deployments. The company provides the best wireless service in the U.S. and covers 370 markets with more than 75% of the U.S. population. Verizon expects to introduce LTE services in 400 markets by year end.

Though Sprint has a smaller LTE coverage, it can still be a great choice for the product due to its unlimited smartphone data plans, which act as a key differentiator. Sprint is rolling out a nationwide LTE network more rapidly than AT&T. The company currently covers 19 cities and expects to expand in 100 more cities by the end of the year.

Leap is the first carrier to offer prepaid iPhone 5 through its Cricket brand. Cricket currently offers LTE services through PCS (1.9 GHz) and AWS bands. Since the iPhone 5 does not support AWS airwaves, Leap can only sell the product in LTE markets that uses the PCS spectrum. The company expects to provide LTE services in at least two-thirds of its overall network foothold in the next 2-3 years.

Hence, for these leading U.S. wireless operators, the rallying point has once again become the iPhone. It remains to be seen which of these competitors get the most out of the latest iPhone version. In the end, we believe that the ability of the new iPhone to drive wireless profitability is yet untested.

As such, we are currently maintaining our long-term Neutral recommendation on Sprint, AT&T, Verizon and Leap. For the short term, the stocks retain a Zacks #3 (Hold) Rank.