Verizon to offer Palm Pre in early 2010

There is still no official word about when or if Verizon Wireless will ever get Apple's iPhone, but the wireless operator has confirmed it will be getting the Palm Pre early next year.

The company's chief operating officer, Denny Strigl, spilled the beans on the impending smartphone availability during a conference call with analysts and investors discussing the company's second-quarter earnings on Monday. The Palm Pre, which was highly anticipated for several months, is threw cold water on a statement made by Verizon Wireless CEO Lowell McAdam that Verizon would offer the Pre on its network within six months. Hesse wouldn't provide details, but he indicated the exclusivity deal between Sprint and Palm lasted longer than six months.

"They need to check their facts," Hesse said in an interview at a press event the day before the Pre was launched. "That just is not the case. Both Palm and Sprint have agreed not to discuss the length of the exclusivity deal. But I can tell you it's not six months."

Now it appears that Hesse may have been simply parsing words. If Verizon does in fact offer the phone in early 2010, that makes the deal technically longer than six months, but not by much.

A Sprint representative declined to comment on the news that Verizon plans to offer the Pre early next year.

So why is this so important? There are a couple of reasons.

For one, Verizon is in desperate need of some hot new phones on its network. Even though Verizon Wireless has always gotten high marks for its reliable wireless network, it has often been seen as a laggard in terms of getting the hottest new cell phones. AT&T has the exclusive deal with the iPhone. The first and second Android devices are being sold by T-Mobile USA. And Sprint Nextel was the first out of the gate with the Palm Pre. Verizon Wireless has an exclusive deal to carry the BlackBerry Storm, but many loyal BlackBerry users have complained about the touch screen. Research In Motion is readying a new version of the phone for later this year.

For several months, rumors have been flying that Apple might be readying an iPhone for Verizon. And many loyal Verizon subscribers, who don't want to leave the carrier, but really want the iPhone, have been waiting for news of a Verizon iPhone. But such an announcement is not likely coming anytime soon.

Strigl's announcement could give these wireless customers and others looking for an alternative to the iPhone, a reason to stay with Verizon Wireless. Strigl admitted during the conference call that the iPhone 3GS, which went on sale in mid-June, hurt Verizon Wireless' sales the last two weeks of June.

"The iPhone has clearly been a successful device," Strigl said. "And it has expanded the overall phone market. We have been competing successfully and will continue to do so. But we did see an uptick in the last couple of weeks in June. (Still,) we think we are extremely well-positioned going forward. The lineup and pipeline of new products we have coming is strong."

The importance of exclusive deals
But the calculated terminology used to describe these deals also indicates just how important exclusive handset deals have become in the competitive wireless market. Carriers see exclusivity on hot new handsets as a way to lure new customers and keep old ones. Recently, these deals have come under scrutiny as members of Congress, the Federal Communications Commission, and the U.S. Department of Justice have all started looking into these deals to determine whether they are really good for consumers and the market in general.

Even Verizon, which has voluntarily offered to limit its exclusive handset contracts to six months, defends exclusive deals. Strigl said during the call that these deals are necessary to spur innovation and competition in the wireless market. He pointed to the Apple iPhone as an example.

Clearly, the iPhone deal has proven to be a major advantage for AT&T. The company announced that it had signed up 1.4 million new subscribers in the second quarter of 2009, about 300,000 more than Verizon signed up during the same quarter. AT&T also said it activated 2.4 million iPhones in the second quarter. And Steve Jobs, the CEO of Apple, said that more than 1 million units of the new iPhone 3G were sold the first weekend the device was available.

Even though AT&T is taking a financial hit in the short term due to the heavy subsidy it pays on each iPhone sold, the company believes its deal with Apple for the iPhone is an investment in the company's future. Already, the company has increased its average revenue per user due in large part to the $30 a month data fee that is required for each iPhone sold. And because these subscribers are locked into a two-year service contract, AT&T sees the iPhone becoming a profit center in a couple of years.

What's more AT&T says that analysis of its iPhone customers indicate that they not only spend more than other wireless subscribers, but they also are more loyal.

And the only reason that AT&T has been able to reap all these rewards is because it is the only carrier offering the iPhone. If it had to share the iPhone with another carrier, like Verizon, it would drastically reduce the effect the phone has on its future profitability.

But can other devices follow in the footsteps of the iPhone and create so much value for a carrier? It seems unlikely. While some people may argue that the iPhone is by no means the best smartphone on the market, most people would agree that it has raised the bar in terms of features, functionality and usability of smartphones.

So far no other single device has created the same buzz or sales traction that the iPhone has created. For example, the Pre, which was highly anticipated since it was announced in January at the Consumer Electronics Show, only sold about 50,000 phones its first weekend.

For most carriers, exclusive deals with smartphone manufacturers have been used to retain existing customers rather than an attempt to grow its base. T-Mobile USA actually rewarded its loyal T-Mobile customers by offering its new Android phone, the MyTouch, to them weeks before it offered it to non-T-Mobile customers. And Sprint Nextel actually held special parties the night before the Palm Pre launch to allow loyal Sprint customers to buy their pre-ordered devices.

Even AT&T admits that the iPhone will one day be sold by other carriers.

"There will be a day when we are not exclusive with the iPhone," AT&T's CEO Randall Stephenson said, speaking last week at Fortune's Brainstorm: Tech conference. However, he declined to get into details on the company's negotiations with Apple.

Apple's CFO Richard Lindner said during the second-quarter conference call that high iPhone sales volume has laid the groundwork and will continue to pay off years from now, even when the iPhone is eventually offered by other carriers in the U.S.

While Verizon defends the need for exclusive deals, the company has always competed on the merits of its network. The Palm Pre will simply give its customers another compelling smartphone choice. And it will give Palm a greater opportunity to sell handsets, given that Verizon is now the largest wireless operator in the U.S.

Verizon Wireless has long contended that it takes more than a single iconic handset to win in the wireless market long term. And this is why the company plans to build its new 4G wireless network. Strigl also announced during the call that Seattle and Boston would be the first two cities where the new 4G wireless network will be tested later this year. The network is expected to be commercially available in 2010. And it will be completed sometime in 2013.

Verizon executives have also said the company plans to offer its own application store for smartphones. Details of the new store will be released on Tuesday at the company's developer conference in San Jose, Calif.