Apple again turns iPhone buzz into gold

January 11, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Apple has again turned iPhone buzz into gold. Despite all the talk of possible bells and whistles, Verizon Wireless looks to be offering the iconic smartphone on roughly the same terms as AT&T. The only clear winners will be Apple’s masters of hype.

Sure, some AT&T customers would be delighted to say goodbye to the carrier’s patchy network. But the costs of switching to Verizon Wireless could be high. Only a third of AT&T’s iPhone customers have contracts that expire this year, according to UBS. Others would have to pay up to $325 in termination fees and least $199 for a new iPhone from Verizon Wireless, because the two networks run on different standards.

As for Verizon Wireless’s customers, they will now get a chance to carry an Apple device. Analysts predict that some 10 million subscribers may choose to do just that this year. But they’ll pay much the same as AT&T users. And for Verizon Wireless itself, that kind of adoption wouldn’t come cheap. Like AT&T, it will subsidize every iPhone to the tune of perhaps $400 up-front for customers with a two-year contract. Furthermore, the handset encourages heavy data use, which in turn demands investment in cell towers and other infrastructure.

Add up the burden, and the operators may not even cover their cost of capital. AT&T’s newer customers must pay more for downloading more data, which can change this calculus. Yet Verizon Wireless may swallow the cost of sticking with all-you-can-eat plans, at least for a while, to win over customers.

Apple is therefore the most obvious winner. Verizon Wireless brings it more than 90 million possible new iPhone users — potentially at the expense of rival smartphone makers. And both AT&T and Verizon Wireless will now have to spend heavily to advertise the iPhone. Apple Chief Executive Steve Jobs and his cohorts have already benefited from the chatter surrounding something that, for any other company, would be a routine product line extension.

Investors, at least, may have caught on. With the much anticipated announcement now out in the open, Apple’s stock dipped slightly on Tuesday. But shares in both AT&T and Verizon Communications, the wireless arm’s controlling shareholder, were down about 2 percent.

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