Apple Isn't Hungry Enough to Need Verizon

Ever since the iPhone debuted on AT&T (NYSE: T), there's been speculation (and wishful thinking, lots and lots of wishful thinking) that Apple (Nasdaq: AAPL) would eventually bring its iPhone to other carriers in the United States -- more specifically, to Verizon Wireless. Sure, there are potential customers who would like to see official Sprint (NYSE: S) and T-Mobile versions, but Verizon is the mindshare leader here.

The widely reported (and mostly believed) timetable for the end of AT&T's iPhone exclusivity contract is mid-2010, which is when Apple is most likely to roll out a new iPhone model.

The last few weeks have seen plenty of speculation, rising and falling with the contentious Verizon Droid "iDon't" ad campaign, as well as the introduction of the Motorola (NYSE: MMI) Droid itself, along with Verizon's 3G coverage map ads that attack AT&T. Verizon has gone on the offensive.

AT&T got defensive with its Luke Wilson ads, along with a short-lived attempt at a lawsuit. More recently, Apple has started -- very gently -- defending AT&T in its latest iPhone TV ads.

The new Apple iPhone ads, by the way, start out with examples showing how you can talk on the iPhone (using voice services) while interacting with applications (using data services) at the same time, which you can't do on Verizon. The Apple ads end with this question: "Can your phone and your network do that?"

As if this is a big deal. I don't think anyone believes that Apple's got AT&T's back.

Does Apple Care?

The question no one knows the answer to is, "Does Apple care?"

On the surface, it's easy to say that yes, Apple needs to deliver the iPhone on other carriers. If it won't make models for every carrier, then it should at least produce units for the major carriers in each market.

Doing this makes easy sense, right? If customers can stick with the best carrier for their needs, it's much easier to choose the iPhone.

So by adding Verizon, Apple could easily gain a massive boost in market share. Case closed.

However, selling more iPhones doesn't necessarily mean that's a good thing. The case isn't closed. Carrier choice is good for consumers, but is it good for Apple? Not necessarily, and this is why this whole topic is a sticky mess.

Apple does not go after market share by lowering the profitability of a device -- this is why we don't see cheaper Macs. Apple seems content to produce devices with higher cost of acquisition prices in favor of bigger profit margins, selling to a smaller customer set that is very intentionally reaching into their wallets and purses and buying Apple on purpose. This makes for customers who try harder to understand and get value out of the machine they just spent so much on, extend their use of the Apple ecosystem, and be more ready to defend their machine and stick with it. Apple's strategy , along with the products themselves, tend to make very loyal customers. It's not just the pretty looks and the OS; it's also the investment and thought process consumers have to go through in order to buy an Apple product in the first place.

But what about the nice US$199 price point of the Apple iPhone 3GS, and the $99 entry price for the iPhone 3G? Maybe Apple had a hand in the pricing, but I'm betting that AT&T is bearing the brunt of the lower prices via the subsidies paid to Apple. Which brings up the point of subsidies: If AT&T loses its exclusivity over the iPhone, there's no way the company will continue paying a premium subsidy to Apple. A lower subsidy equals a lower margin for each iPhone. If Apple wants to retain the margin, it would mean a higher price for consumers or a cheaper manufacturing process, neither of which are easy.

The point is, by going wide with Verizon and AT&T in 2010, Apple's margin on each unit might drop, and Apple enjoys some of the best margins in the business.

Yes, but What About AT&T's Lousy Customer Service Rankings?

In the Consumer Reports latest cellular service survey of 50,000 readers in 26 cities, AT&T was ranked last in customer satisfaction, with Verizon definitively ranking first. Still, Consumer Reports noted that only 54 percent of respondents were completely or very satisfied with their cell phone service, and that despite offering smarter phones, more flexible plans, and faster wireless networks, cell service continues to be among the lower-rated of all the services that Consumer Reports evaluates.

AT&T barely responded to the report, noting that its churn rate of customers leaving AT&T is at 1.17 percent, which indicates general happiness with AT&T. [*Correction - Dec. 4, 2009] Or maybe it indicates long-term contracts. Or maybe the churn rate is that low due to Apple's iPhone.

Either way, the premise here is that many iPhone owners love their iPhones but dislike AT&T, though they're willing to stick with AT&T because of the iPhone.

Love or Hate AT&T, It's About Net New Customers

The question in my mind comes down to how Apple wants to gain new sales in the latter half of 2010. Notice that I said "sales" and not "new customers." Apple would be plenty happy selling upgraded iPhones to existing iPhone owners like me, a guy who has an iPhone 3G and is skipping the 3GS.

If Apple can deliver a new and improved iPhone that can stay ahead of up-and-coming smartphones, I'm in. But what if Apple has a lackluster new version on its hands? That's dangerous. What's an easy way to compete? A new carrier. Mindshare and market share would explode, giving the engineers in Cupertino more time to figure out the next big leap forward.

But What About LTE and World Chips?

While Verizon and AT&T fight over 3G coverage, they're both moving toward 4G service networks, also known as "LTE," with some rollouts in major markets in 2010. They are on a converged path that will make it easier for manufacturers to create devices that could run on either network. Right now, there are some unconfirmed reports that Apple is already testing its next-generation iPhone. Don't get too excited; these kind of reports cropped up in October of 2008, which led to the iPhone 3GS in the summer of 2009. Basically, Apple has to test far in advance of a rollout. So, would Apple gamble on LTE being ready in the summer of 2010? It's hard to see this happening, hard to imagine that either Verizon or AT&T are really going to be ready for anything on the scale of a new iPhone.

Would Apple bother creating a CDMA-based iPhone just for Verizon's existing-but-on-the-way-out services? Again, hard to imagine.

However, what about a phone using Qualcomm's (Nasdaq: QCOM) new hybrid chips that support a dual-carrier mode for today and will support LTE in the future? Lots of ifs here, too: if it works well, if it's priced well, if it's done right this moment so it could be tested in time.

What about a contract with Verizon? The nation's largest wireless service provider rebuked Apple once -- might it do so again? Might it be more profitable peddling iPhone alternatives? If iPhone owners are responsible for using the bulk of AT&T's data network, is Verizon taking a hard look at what it would cost to serve a few million iPhones in 2010?

As much as I'd like to see new iPhones that run on multiple networks in 2010, there are lots of reasons why it might not happen, and many of them Apple can't control. And despite all of the reasons, there's one thought that I just can't shake: I don't think Apple feels the need to be on Verizon. The iPhone is already supremely popular, there are plenty of halo effect sales for the Mac, the App Store is going gangbusters, and there's plenty of world markets left to conquer.

I've been watching this space for a while now, and what I haven't been able to find yet is an argument that says Apple absolutely needs Verizon in 2010 in order to retain profitable iPhone success.

Damn.