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Verizon rides iPhone boom too; but what about LTE?


There are two conclusions that can be drawn from Verizon Wireless and AT&Tís Q1 earnings calls this week. The first is that there was obviously no huge exodus of iPhone users from AT&T to Verizon. The second is that style is taking precedence over speed in the minds of consumers.

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In its Q1 earnings call Verizon Wireless (NYSE:VZ, NYSE:VOD) reported 2.2 million iPhone activations, a huge number, but one that fell well short of the 3.6 million new iPhone subscribers AT&T reported on Wednesday (CP: AT&T sails through loss of iPhone exclusivity). Itís important to note that Verizon only started selling the CDMA iPhone in on Feb. 10 (though it started taking pre-orders at the beginning of the February), meaning AT&T had an advantage of a whole month of sales. With a full quarter of sales, Verizon might have matched AT&T iPhone for iPhone.

The most significant number, however, was 22%, the number of iPhone customers new to Verizon. While AT&T new iPhone activations were high, it reported meager postpaid net additions, implying those new iPhone activations filled the hole left by a lot of fleeing customers. But if AT&T customers did come over to Verizon, they didnít come in droves. Apart from the 484,000 new customers lured by the iPhone, Verizon mainly converted its existing subscriber base to Apple (NASDAQ:AAPL) customers.

The biggest beneficiary from the VZW and AT&Tís iPhone clash is Apple. In last yearís first quarter, AT&T activated only 2.7 million iPhones, which would have covered the whole U.S. market. By doubling its carrier deals, Apple isnít diluting its sales among the two operators; rather it more than doubled its total sales. Combined AT&T and Verizon sold 1.5 million more iPhones than AT&T sold over in Q4, which is always the industryís best quarter due to the holidays. The two even exceeded the 5.1 million iPhones sold in the third quarter, the first full quarter of iPhone 4 sales.

Unsurprisingly, Apple recorded a very good quarter, shipping 18.7 iPhones in the first three months of the year along with 4.7 million iPads (Bloomberg: Apple rallies as earnings almost double). According to Strategy Analytics, Apple is now the largest handset maker in the world by revenue, surpassing Nokia.

Much of last quarterís iPhone sales were driven by the excitement of the iconic device moving to a different operatoróthat allure wonít last forever. Also, facing the looming lost of exclusivity, AT&T also heavily discounted the iPhone 3GS and offered early upgrade deals to its customers for the iPhone 4 in an effort to lock in customers. Of course those competitive pressures only benefited Apple since AT&T ate the cost of subsidization. At the end of the day, Apple has managed to generate record sales on a device that will soon be replaced, all by adding another carrier channel. Itís a wonder it doesnít sign up with all of the U.S. operators both big and small.

But Verizon didnít have one major smartphone launch last quarter. It sold 260,000 HTC Thunderbolts, the first of smartphones that access its new long-term evolution (LTE) network and the first handset VZW is marketing under the 4G banner. VZW only started selling it in the last half of March, making it a respectable figure for the two first weeks of sales, but it still pales in comparison to the volumes of iPhones Verizon is selling. Typically a new device, particularly a heavily marketed one like the Thunderbolt does best in its first week (VZW sold more than 1 million iPhones in the first three weeks), but even if VZW keeps up that sales pace of the Thunderbolt, it would still be heavily overshadowed by the iPhone.

In January, Connected Planet predicted that Verizon landing the iPhone would complicate the launch of its new 4G LTE service, but we projected that LTE smartphone sales would eat into iPhone sales (CP: The unexpected winner in the VZW-Apple deal: Google). Itís still far too early to draw any definitive conclusions, but at least initially the reverse seems to be true: The glitz of the iPhone is outshining the new Thunderbolt, even though Verizon is marketing the device just as heavilyóif not more heavilyóas the iPhone.

Several independent studies as well as Verizonís own ads show that the Thunderbolt is the fastest thing on the airwaves (CP: A closer look at BTIGís 4G speed tests), which would seem to give a clear competitive advantage in a market dominated by speed claims. The iPhone obviously has a huge reputation behind it while the Thunderbolt and LTE are new comers to the market, so the situation could easily reverse as more LTE handsets emerge and the network speeds get more buzz. But for now it appears that Verizon customers are choosing the familiarity and allure of the iPhone over the speeds of VZWís new network darling.

This all becomes moot when Apple launches an LTE version of the iPhone, putting the device on the cutting edge of network technology as well as style and usability. But donít expect an LTE iPhone any time soon. Reuters reported Wednesday that Apple will delay its usual summer iPhone refreshment until September, but even that device will likely be an high-speed packet access plus (HSPA+) iPhone not an LTE one. At Verizonís conference call, CFO Fran Shammo said that Verizonís next iPhone would be a global device, which means it will have GSM and possibly UMTS radios to go along with CDMA, but he said nothing about LTE.

Overall, Verizon reported net adds of 907,000 contract subscribers, more than half of which were new iPhone customers, while it lost 27,000 prepaid customers. On the wholesale side added 897,000 new connections, which include everything from 3rd party ebook readers to M2M links. Verizon now has 104 million connections, 88.4 million of which are retail customers with the remaining 15.6 million served by its wholesale division. Itís smartphone penetration jumped from 28% of its subscriber base to 32%, but considering the huge volume of new iPhone activations, the increase should have been higher. According to Bernstein Research senior analyst Craig Moffett, this suggests that most of those new iPhone customers were already Verizon smartphone subscribers simply shifting to the new platform.


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