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Verizon iPhone won't be AT&T's doomsday

verizon_iphone.top.jpg By David Goldman, staff writer


NEW YORK (CNNMoney.com) -- Apple's iPhone is widely expected to come to Verizon Wireless next year. Here's the surprise twist: That won't spell disaster for AT&T.

AT&T (T, Fortune 500) has been pounded for years about its network struggles, which recently got it crowned "worst carrier" in America in a Consumer Reports survey. IPhone addicts are often the company's most vocally unhappy customers.

But AT&T isn't sweating bullets about the prospect of customers fleeing en masse when its exclusivity deal with Apple (AAPL, Fortune 500) comes to an end.

The telecom giant -- and many of the industry analysts who cover it -- predict that the vast majority of AT&T's roughly 20 million iPhone customers will stick with the wireless carrier.

AT&T had the strategic foresight to lock most of them into long-term contracts lasting deep into 2011 and beyond. That makes it painful for those subscribers to switch to another carrier -- and makes the Verizon iPhone pill much easier for AT&T to swallow.

Here's a closer look at why AT&T doesn't have to worry too much about its upcoming iPhone rival:

Early upgrades: Over the past six months, AT&T enticed millions of its iPhone customers to lock themselves into new two-year contracts by offering early upgrades.

When Apple started selling the iPhone 4 in June, AT&T allowed any customer whose contract was running out at any point in 2010 to get the new iPhone for $199, instead of the typical $599 price for customers in the middle of their contracts. The catch: Customers had to sign a new long-term contract.

In the first three months that the iPhone 4 was on sale, AT&T locked in 5.2 million customers. Analysts expect the company to have reeled in millions more during this quarter.

"AT&T knew the window of exclusivity would collapse, so there was a very explicit effort on AT&T's part to give customers an expanded window of time to get the subsidy on the iPhone," said Charles Golvin, analyst at Forrester Research. "It was quite successful in locking those customers in."

It's really expensive to switch: Customers under contract will need to fork over a $325 "early termination fee" to AT&T if they switch. It's prorated, but each each month of completed service knocks just $10 off the tab.

That's not all. AT&T's iPhone customers will also need to buy a whole new iPhone if they want to switch to Verizon (VZ, Fortune 500). That's because the two carriers operate on a different technology standard, and the chip in AT&T's iPhone is not compatible with Verizon's network.

If you bought a new iPhone 4 on AT&T when it came out in June and then switch to Verizon in early 2011, you'll have shelled out around $645 for iPhones in a matter of months -- $200 for the AT&T iPhone 4, about $200 for the essentially identical Verizon iPhone 4, and $245 or so for the early termination fee.

Switching is particularly painful for those with family plans, since they have to buy all new phones for their whole family. AT&T says 80% of its customers with integrated devices -- a category that includes the iPhone -- are on "Family Talk" or business plans.

AT&T's customers are 'sticky': About two-thirds of AT&T customers are happy with their service and say they won't switch wireless companies for any reason, according to a recent a Booz & Co. survey.

For the other third, the biggest factor that would motivate them to switch is lower costs. But experts don't expect Verizon's iPhone pricing to be substantially different than AT&T's. (The margins are ultra-thin on the iPhone, since carriers take a hit of about $400 in subsidies for each device.)

AT&T can weather the storm: An estimated 2.5 million AT&T iPhone customers will defect to Verizon in 2011, according to Yankee Group, which based its forecast on a survey of 15,000 U.S. consumers. That prediction falls right into the range of most analysts' forecasts.

That sounds like a lot, but it represents just 3% of AT&T's base of 93 million customers.

Plus, defections are a fact of life of the wireless business -- one that AT&T has successfully weathered in the past. About 12% to 15% of the company's wireless subscribers have historically terminated their contracts each year, but AT&T has consistently added more customers each year than it lost.

For those that do leave, AT&T will reap the rewards of their early termination fees, blunting the loss to the company's revenue.

The end result of all those calculations is that most analysts expect a minimal impact on AT&T's bottom line.

Mike McCormick, a financial analyst at Nomura, expects AT&T to lose a net 1.3 million customers next year. He thinks company will probably take a $689 million hit to sales. Booz & Co.'s George Appling, who expects a 2 million customer loss, anticipates a $1.7 billion hit.

But that's a drop in the bucket for a company the size of AT&T.

"AT&T is a $120 billion a year company," Appling said. "$2 billion could get easily washed away and hidden."

Don't expect AT&T to simply roll over: AT&T's network has a few technical advantages over Verizon's. Expect them to be heavily advertised.

AT&T operates on the GSM standard, which allows customers to talk and surf the Web at the same time -- a features that Verizon's CDMA network doesn't allow. GSM is also used in far more countries, allowing AT&T's phones to work across the globe -- something most of Verizon's phones can't do. Analysts expect AT&T to go hard after Verizon on those points in advertisements once both networks carry the iPhone.

AT&T says it's serene about its future.

"We are the industry leader in smartphones; we offer the iPhone and other great devices and we will continue to do so," said company spokesman Mark Siegel. "We operate the nation's fastest network and we plan on making it even faster."

So if there is a massive fallout from Verizon getting the iPhone, it likely wouldn't happen until the latest round of two-year contracts are up. That wave hits in late 2012 and early 2013.

But by that time, AT&Ts 4G network -- a years-in-the-works upgrade that the company has poured billions into -- will be in place. All of those network problems that the company's customers have suffered through for years could become a thing of the past.

"It's certainly possible that some AT&T customers will leave for Verizon in 2012 or 2013, but the smartphone market is rapidly changing," said Forrester Research's Golvin. "It's hard to look out and say one way or another."  To top of page

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