Angry iPhone users: Frustration with AT&T could boost Verizon shares
Jul 20th 2009 12:15PM
Updated Dec 4th 2009 6:21PM
This weekend a brouhaha erupted online after TechCrunch writer MG Siegler wrote a post entitled, "AT&T is a Big, Steaming Heap of Failure." Siegler chronicled how AT&T (T) failed for two weeks to deliver any voicemails left on his iPhone number to the handset's visual voicemail system.
In comments to the article, PaidContent.org founder Rafat Ali chimed in that a source had left a voicemail on his iPhone confirming what would have been a huge scoop -- that BusinessWeek magazine was up for sale. But the message got lost in AT&T's mobile network and Ali missed out on the scoop, a failure that probably cost his site thousands of dollars in lost advertising revenues. For his part, Siegler missed numerous work calls. The take home from this? AT&T is becoming a huge liability to Apple (AAPL). Buy Verizon (VZ) shares pronto as Apple will have to sell its iPhones elsewhere.
A little back story is in order. Several years ago when I was doing research for hedge fund analysts, I sat in on a lunch for our clients with an engineer who had been one of the lead architects of Verizon's innovative and hugely expensive fiber-to-the-home program (FiOS). Our clients were asking him why the company needed to spend so much money when AT&T was planning to deliver what it claimed would be a similar broadband boost to residential connectivity by relying on new fiber optic systems that did not travel all the way to the customer's doorstep, but instead stopped at the nearest central switching office.
The guest put it succinctly: "AT&T is building a network for the next few years. We are building a network to last for the next 50." Verizon was willing to put out big time in order to ensure long-term headroom for what it hoped would be a premium offering. This is the difference in their corporate outlooks. AT&T wanted to save money upfront and pay more later. This has characterized AT&T's mobile network, as well. AT&T has been woefully unprepared to deliver top-grade service to iPhone subscribers, despite charging them top-grade prices.
Across the country, complaints are mounting about slow network speeds on supposedly broadband mobile connections. My friend, Carnet Williams, is CEO of Sprout, a social media company that helps companies and organizations quickly roll out Facebook pages and build other types of social media applications (full disclosure: I did some consulting work for him about a year ago but no longer have any involvement with the company). Carnet is now on his third iPhone and he lives in the Mission, a San Francisco neighborhood that surely has a very high level of iPhone penetration.
Yet a full year after Apple started selling the iPhone 3G, he can't get 3G network connectivity in his apartment or in large chunks of his neighborhood. That's when he can even get reception at all (he often can't in his apartment). Think about it. AT&T can't even beef up the San Francisco networks to accommodate its most rabid fans. This is fairly mind-boggling.
The travails of Siegler, Ali and Om Malik, another major media entrepreneur who actually ditched his iPhone to return to a Blackberry from Research in Motion (RIMM), have been widely publicized and are certainly being discussed at Apple HQ in Cupertino.
As a general rule, Apple likes to control its press coverage. The company is OK with bad press arising from moves to exert control over its products. But Apple simply cannot stand press that trashes the performance or value of its products. And Apple definitely cannot stand press that includes prominent journalists discussing how a key Apple partner has effectively cost them money and made it harder to do their jobs. This is equivalent to a multi-million dollar media campaign for the Blackberry and the Pre from Palm (PALM).
Without a doubt, the AT&T bashing is among the worst press Apple has had to endure in years, and Apple's iPhone team has surely made some pointed calls to their good friends over at AT&T. Realistically, AT&T's network problems will get far worse before they get better. My wife bought an iPhone 3G and has promptly started emailing multiple videos daily to relatives. This is relatively new behavior for iPhone users and it will literally crush AT&T's networks. But the process of upgrading networks can take months and often years. Engineers must be called, workers must climb up poles, new lease rights for cell phone towers must be negotiated, and nothing is fast.
Apple can no longer continue relying on AT&T as the exclusive carrier for its iPhones and has to open up the service or risk losing credibility with the technophiles who are among Apple's primary customers. The exclusive agreement is up for renewal next year The only other likely partner is Verizon, due to its robust network and the strength of its retail stores and distribution. BusinessWeek reported that Verizon and Apple were already in discussions.
Verizon will probably bargain for better terms than AT&T got from Apple, and Verizon will likely receive some concessions. The AT&T fiasco has put Apple in a far weaker bargaining position than they would have been in a year ago and Verizon surely knows this. As AT&T itself has admitted, iPhone sales have constituted a fairly significant part of their subscriber growth since the launch of the product. iPhone users are also the biggest data services users around, which means they tend to pay a whole lot more in monthly fees.
Add this all together, and it is not a great leap to think that Verizon will put out some good news regarding Apple later this year or early next. Verizon shares will surely soar on the news. Even without the news, Verizon shares are quite tasty, paying out an annual dividend in excess of 5 percent. Consider AT&T's network disasters the ultimate upside freebie and a good reason to think hard about stocking up on shares of the largest telco in the country.