Switching carriers for the iPhone

AT&T competitors could take a hit in the next few quarters as enthusiastic Apple fans switch providers for the hyped device.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
8 min read
Kristy Miller will line up at the AT&T store in the Phoenix suburb of Surprise, Ariz., on Friday in an attempt to be one of the first iPhone owners, but that will mean ditching the wireless service she already has with Verizon Wireless.

"I do have trepidation about switching from Verizon to AT&T, but I figure Steve Jobs wouldn't have made the deal if he couldn't back it up," she said. "Verizon has one of the largest networks, but AT&T has the iPhone."

The 36-year-old, who owns a graphic design business with her husband, said she needs the iPhone for e-mailing, Web access, and sending and receiving files--all functions she could easily do with another device like a Treo or BlackBerry, which are already sold through Verizon Wireless. But as a Mac user for more than a decade, she admits she is drawn to anything created by Apple and Apple CEO Steve Jobs.

"I was going to have to break down and buy a BlackBerry," she said. "But when they announced the iPhone, I decided to wait."

It's customers like Miller AT&T's competitors--Verizon Wireless, Sprint Nextel, and T-Mobile USA--should worry about. According to a recent poll conducted by M:Metrics, roughly two-thirds of people interested in buying the iPhone are not currently AT&T customers, but they say they're still willing to switch carriers to obtain the phone. AT&T will be the exclusive carrier of the iPhone.

"The data we have suggests that this is going to work as a customer acquisition strategy for AT&T," said M:Metric Senior Analyst Mark Donovan. "The market has matured to the point where carriers are stealing subscribers from each other. And a cool new phone like iPhone has certainly generated a lot of interest."

News.com Poll

Calling plan
Will you buy an iPhone?

Are you kidding? I'm in line now
The next time I'm at an Apple store
After I read the reviews - maybe
When someone other than AT&T is the carrier
Not till the price is under $200
No 3G? No way!

View results

The iPhone, announced in January, has been one of the most widely hyped gadgets ever to go on sale. Jobs says he expects the company to sell 10 million iPhones in the first 18 months. By contrast, Research In Motion has sold only 14.6 million BlackBerry devices since 2000. The company has ramped up sales recently as it targets the consumer market, selling 6.4 million devices during the 2007 fiscal year, which ended March 3, 2007.

Interest among consumers certainly seems piqued. AT&T CEO Randall Stephenson in March said more than a million people had inquired about how they can get their hands on the new iPhone. People in Manhattan are already lining up for the iPhone days in advance of its sale.

If the hype lives up to expectations, the iPhone could help AT&T boost subscriber growth, just like the Motorola Razr helped boost subscriber rates when Cingular Wireless (now called AT&T) had a nine-month exclusive deal to sell that phone. Motorola, which now offers the phone through every major U.S. carrier, recently said it has sold more than 100 million Razrs since the product was launched a few years ago.

But what could be a windfall for AT&T will likely mean bad news for competitors. More than 76 percent of the U.S. population already owns a cell phone. And AT&T makes up only about a quarter of those subscribers, so many of those interested in the iPhone would have to switch their service to use the phone.

Sprint Nextel vulnerable

While all three major carriers are likely to see some defections, Sprint Nextel will likely be most vulnerable to fallout from the iPhone. The company lost 220,000 post-paid monthly subscribers--customers who pay monthly--during its first quarter, the third quarter in a row it saw losses of these highly valuable customers. Most of these defections were to competitors. Sprint along with T-Mobile have also consistently had high churn rates, or rates at which people cancel their service. At the end of the first quarter of 2007, Sprint reported a churn rate of 2.7 percent. T-Mobile's churn rate was 2.6 percent.

According to M:Metrics' survey, subscribers from Sprint and T-Mobile were also the most likely to say they would switch providers to get the iPhone. About 12.5 percent of T-Mobile customers and 8.1 percent of Sprint customers surveyed expressed a high interest in the iPhone.

Sprint is also vulnerable because it has spent a great deal of money and effort marketing its advanced 3G data services to tech savvy individuals.

"Sprint tends to have the most enthusiastic data users," said Charles Golvin, an analyst with Forrester Research. "These are early adopters, and they're also the ones likely to be interested in the iPhone."

Indeed, the most valuable piece of Sprint's business is its 3G EV-DO network. In the first quarter, it generated $1.2 billion from wireless data services, up 44 percent from the previous year. Data contributed about $9.25 or 16 percent of Sprint's total average revenue per user for the quarter, which was about $59.

Specifically, Sprint has been pushing its music service, which allows songs to be downloaded over the air for 99 cents each. And it has recently announced several new phones specifically designed for music, including the Samsung UpStage, LG's Fusic and the new LG Muziq. These phones all sell for less than $100. By contrast, the iPhone costs $500 for a 4GB version and $600 for an 8GB version. Of course, the iPhone is more than a music phone. It's a full smart phone with e-mail and mobile Web browsing functionality. To compete here, Sprint offers the HTC Mogul, a Windows Mobile device.

"We really feel like a rising tide will lift all boats," said Aaron Radelet, a spokesman for Sprint. "When customers are able to compare services and phones side by side and they look at pricing, we are confident they will see the value in Sprint."

But some of Sprint's customers say that even at $500 and $600, the iPhone simply offers them more for the money. San Diego resident Omar Bazigran is a Sprint customer who let his contract run out in anticipation of switching to AT&T for the new iPhone. Even though Sprint offered him a new updated handset and a 10 percent reduction on his phone bill, he still says he will likely buy the iPhone because he thinks it is a better value.

"The difference between EDGE and 3G is night and day. Customers are going to assume that they can get the same speeds they get on Verizon and Sprint and they can't. And if they roll out a 3G version of the phone in six months, I think they're going to have a lot of pissed off customers."
--Patrick Comack, analyst, Zachary Investment Research

"I figure an 8GB iPod Nano would cost me $250," he said. "Then, a smart phone would be a couple few hundred dollars, and then an extra $50 to $100 to have the two products fused into one isn't such a bad deal for the person who was thinking of buying those two things separately anyway."

And AT&T's newly announced pricing for the iPhone data plan makes it seem even more attractive. For $60 a month, users get 450 minutes of talk time. For $80 a month, they get 900 minutes of talk time. And for $100 a month, they can talk for 1,350 minutes. All plans include unlimited e-mail and mobile Web surfing and 200 text messages a month.

Verizon Wireless has taken a similar philosophy that iPhone could actually help it sell its data services. Like Sprint, Verizon offers an over-the-air music download service. And executives at the company believe customers will see the value of its services as a differentiating factor.

"The iPhone will add excitement and stimulation to the market," Verizon CEO Ivan Seidenberg said at a conference last week. "If we have done our job, then we will be a beneficiary. I hope it does reasonably well."

But analysts say that Verizon is already in a much better position than Sprint. The company has consistently added more subscribers than its competitors every quarter and it also tends to lose fewer customers than any of its competitors with a churn rate that hovers around 1.1 percent.

"It would take a lot to damage Verizon Wireless," said Patrick Comack, an equities analyst with Zachary Investment Research. "But Sprint is already struggling. Taking away any subscribers from them now is like kicking them in the ribs when they're already down on the ground."

Need for speed

The one thing that both Sprint and Verizon have going for them is their 3G networks. The initial iPhone will work only on AT&T's 2.5G network. This means that while 3G phones from Verizon and Sprint will be able to download files and surf the mobile Internet at speeds between 400 and 700 kilobits per second, the iPhone will surf at speeds more like 200kbps.

The lack of 3G is one reason that at least one Sprint user said he will wait for a new version of the iPhone before he makes the switch to AT&T. Paul Tunison, of Modesto, Calif., said he is a faithful Apple customer, but he isn't sure he could stomach the slower speeds.

"If the iPhone was 3G capable today, it would be a nonissue for me," he said. "I'd likely go ahead and buy one, but I just don't see the value if it doesn't have 3G."

Comack of Zachary Research said he thinks some Verizon and Sprint customers are going to be annoyed when they realize see how slow AT&T's EDGE network is compared with the 3G networks.

"The difference between EDGE and 3G is night and day," he said. "Customers are going to assume that they can get the same speeds they get on Verizon and Sprint and they can't. And if they roll out a 3G version of the phone in six months, I think they're going to have a lot of pissed off customers."

While it's clear that the iPhone has been hyped, some analysts wonder if people will actually follow through on the excitement and take the plunge.

"Most people subscribe to a cell phone service because of the network coverage or the price of the service," said Iain Gillott, founder of iGillottResearch. "So will the iPhone be different enough and cool enough to get people to switch service just for the phone? It will be interesting to see what happens."