Verizon's iPhone decision six years ago is looking better and better.

Commentary about business and finance.
Jan. 10 2011 7:26 PM

Insanely Savvy

Why Verizon's decision to pass on the iPhone six years ago is looking better and better.

iPhone.
The Apple iPhone

Six years ago, Steve Jobs, the reality-distorting founder and CEO of Apple, held a series of secret meetings with executives from top telecom companies. Apple executives were preparing to dip their toes into the cell phone market with the Rokr, a Motorola smartphone with iTunes software. But they were also preparing to plunge in with a bigger and better product of their own. Jobs wanted carriers to help develop a new smartphone—what we now know as the music-playing, touch-screen-sporting, video-streaming, app-launching iPhone—in exchange for an exclusive five-year revenue-sharing deal. Verizon said no. Cingular, now known as AT&T, said yes.

For Verizon, the decision became infamous, the industry equivalent of passing on Michael Jordan in the NBA draft. It was an "incredibly bad decision," as one blog put it succinctly. Verizon has been forced to watch as the breakaway success of the iPhone pushed legions of profitable smartphone customers to AT&T. Although Verizon remains the largest wireless carrier, with about 8 million more subscribers than AT&T, AT&T's wireless business has grown faster than Verizon's in the past few years—due in no small part to its exclusive deal with Apple.

Advertisement

Since 2007, AT&T has picked up millions of new contracts from customers coming just for the iPhone. In its most recent annual report, it gloated, "Compared with our closest U.S. competitor, twice as many smartphone users have chosen AT&T—one of the key factors driving wireless revenue growth of nearly 9 percent." Asymco, a mobile app developer and analysis firm, concluded simply: "The iPhone has stolen Verizon's growth."

But soon AT&T's exclusive contract with Apple for the iPhone will come to an end. Tuesday, Verizon is widely expected to announce that it will become the second U.S. carrier to offer the iPhone, at a big press conference at Lincoln Center in Manhattan. (Even if Verizon has, for some strange reason, decided to punk the press and does not make the announcement Tuesday, it has confirmed that it will be offering the product at some point in the near future.)

Any way you look at it, that is great news for Verizon (it gets to compete for the iPhone market!) and bad news for AT&T (it has to compete for the iPhone market!). And with Verizon finally getting on the iPhone action, it's time for a reassessment of its fateful decision six years ago to pass on the Apple product: Was saying no really such a bad thing for Verizon? With the benefit of hindsight—and the prospect of a Verizon iPhone on the horizon—the decision hardly seems as horrible as it once did. There is a silver lining to that five-year-old, earnings-dulling gray cloud.

Most importantly, when AT&T threw its lot in with Apple, it really threw its lot in with Apple. The company offers a broad range of smartphones, but has nevertheless developed a wireless business dependent on the iPhone for both sales and margin. As noted above, most of AT&T's new smartphone customers come not just for the company's service, but for Apple's product. With that product now available elsewhere, if Verizon offers better or cheaper plans or service, AT&T's customers might abandon it.

And AT&T depends on the iPhone not just for most of its new customers, but for its most lucrative customers. The "iPhone exclusive continues to deliver high-value subscribers with [average revenue per user] approximately 1.6 times higher and churn rates significantly lower than the company's overall postpaid subscriber base," AT&T itself said—fatefully—in a 2009 quarterly report. (It later stopped breaking out the iPhone's average revenue per user, instead folding it in with all smartphone data.) Verizon, in contrast, depends less on any one business relationship or product. (For instance, it runs a healthy business selling phones running Google's Android software—and Droids just overtook iPhones in total market share.) And iPhone sales, for Verizon, will be gravy on an already profitable business, rather than the core of a profitable but newly shaken one.

  Slate Plus
Slate Picks
Dec. 19 2014 4:15 PM What Happened at Slate This Week? Staff writer Lily Hay Newman shares what stories intrigued her at the magazine this week.