Why Apple Will Finally Break Its AT&T iPhone Exclusive Next Year

iphone verizon card

Waiting for an iPhone on Verizon? It probably won’t be much longer.

We think Apple will dump its AT&T exclusive next year and start selling phones on more U.S. carriers — especially Verizon Wireless, the nation’s largest — by next year.

Unless AT&T has been able to renew its exclusive agreement with Apple — which we doubt, given how poor AT&T’s network service has been — the agreement will expire some time next year. We therefore expect Apple to start selling a second, CDMA-based iPhone — which will work on Verizon Wireless — as soon as next summer.

The phone might also be able to handle Verizon’s 4G network, which will still be nascent next year. And it will likely be able to accept a GSM SIM card for overseas roaming, the way CDMA-based rivals like the RIM BlackBerry Storm and Tour can.

Dumping the AT&T exclusive would pay off immediately for Apple financially.

AT&T probably sells around 8 million iPhones annually in the U.S. We think a similarly priced Verizon iPhone could easily sell an additional 2-4 million phones in its first year.

At an average wholesale price of $500, that could be $1 billion to $2 billion in extra sales for Apple, which would justify the investment required to build a CDMA phone (Verizon’s network uses a different technology than AT&T’s). If Apple sold phones at Sprint and T-Mobile, too, the incremental sales would be even higher.

The downside: Apple’s unit margins will shrink, as AT&T and Verizon will pay lower subsidies for the non-exclusive relationship.  But Apple will likely make this up in volume.  And, most importantly, the smartphone game is a platform war: Apple will be smart to take lower margins now to secure its spot as the top smartphone platform.

Why drop the AT&T exclusive now?  Because things have changed in the past two years.

Previously, it made sense for Apple to stick to one technology, GSM, because it was new to the phone business, and should focus on the most popular technology. But now that Apple’s phone business is more mature, there’s no reason not to offer phones for both flavours of wireless network, as RIM, Nokia, and other phone vendors do.  Especially now that Apple has seen the outcry for an alternative to AT&T‘s network.

The cost for Apple to develop a CDMA iPhone would be trivial, says Amol Sarva, CEO of Peek, a wireless gadget startup, and former executive at Virgin Mobile USA. If a hybrid phone is already in Apple’s road map, the incremental cost would essentially be zero. If not, it might cost $5 million to spin out a different version, Sarva says.

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