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Creating an Apple iPhone for the Verizon Wireless network is in Apple’s best economic interests, according to a new research report from Citigroup Global Markets analysts Richard Gardner, Michael Rollins and Jim Suva.
The May 5 report outlines 10 reasons why the analysts believe Apple will not extend its contract with AT&T for the long term but will offer the iPhone to a new carrier, likely Verizon.
The costs of developing a CDMA iPhone are outweighed by the profits that exposure on a new network could offer Apple, the report states.
“Opening up the market for iPhones to multiple carriers in the U.S. can add roughly 2 percent to earnings and 6 percent to our free cash flow estimates in [fiscal year 2011], respectively, even with the risk that Apple would be paid less per phone by current carriers upon entering into non-exclusive relationships,” the analysts write.
“We see Verizon as the most likely contender to be the next U.S. provider that can add roughly 3 million incremental users by [the end of] 2012 relative to our current forecasts,” the authors added.
While some analysts have suggested an Apple iPhone on the Verizon network was unlikely to happen before Verizon rolled out LTE, its 4G technology, the Citi analysts write that this isn’t necessarily so; because LTE will initially be a data-only technology, CDMA 1xRTT technology will still be necessary for voice.
“The implication is that Apple would need to alter the iPhone software to support a CDMA baseband chipset for Verizon and other CDMA-based carriers regardless of whether it chooses an EV-DO path or LTE path for data services,” the authors write.
This process would be eased by the fact that Qualcomm is expected to release a dual CDMA/LTE chip set by mid-2010, saving Apple much trouble of rewriting the baseband itself.
An iPhone on the Verizon Wireless network would benefit both Apple and Verizon, but it would create new risks for Palm and Motorola.
The analysts believe the Palm Pre “looks like a winner,” but an iPhone in its CDMA territory could create problems for it.
Motorola is already having difficulties differentiating Android-based products, the analysts believe, and the iPhone, which “almost certainly will offer a richer, more mature user experience” than Android, is likely to increase those difficulties.
RIM already competes successfully with Apple at AT&T, say the analysts, who plan to keep an eye on where “ostensibly reduced iPhone subsidies are re-allocated.”
As for AT&T, the Citi analysts predict that the iPhone will continue to help the carrier and generate roughly 23 percent of its service revenue through 2010. And while the impact of iPhone extending its business is likely one to two years away, the analysts suggest the need for AT&T “to market successful smartphone alternatives to the iPhone.”