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Apple will probably introduce a version of the iPhone that works on Verizon Communications' network early this year, creating a challenge for AT&T Inc., until now the exclusive U.S. distributor of the device.

AT&T, ranked last in user satisfaction by a Consumer Reports survey last month, has reason to be concerned about losing the iPhone arrangement it has held since Apple introduced the device in 2007, but the damage may not be as severe as anticipated.

At least initially, Verizon's iPhone may have weaknesses compared with AT&T's. The expense and hassle of changing carriers could also work to AT&T's advantage, according to Charles Golvin, an analyst with Forrester Research in Cambridge, Mass.

"I'm sure some AT&T customers are sufficiently frustrated to switch, but the vast majority are at least happy enough," Golvin said.

Apple's introduction of a Verizon iPhone will come after next week's Consumer Electronics Show in Las Vegas, according to a person familiar with Apple's plans who isn't authorized to discuss them publicly. Estimates from industry analysts of the resulting number of defections to Verizon from AT&T range from 1 million to 6 million.

John Hodulik, an analyst at UBS AG in New York, comes in somewhere in the middle. He predicted that AT&T will sell 8.8 million iPhones in 2011, down from 15.6 million in 2010. Of the 13.3 million Hodulik expects Verizon to sell in 2011, about 2.3 million will be to AT&T refugees, he predicted. An additional 10 million will be Verizon subscribers who upgrade from other devices, and the rest will come from other carriers.

Still, even if AT&T loses more than twice as many customers as Hodulik projects, the carrier will not suffer a fatal blow. If 6 million of its customers defect, the $6 billion in lost annual revenue would amount to about 10 percent of AT&T's wireless sales in 2011, according to UBS projections. The $6 billion would be 4.8 percent of its total projected sales of $126 billion in 2011.

Promoting alternatives

AT&T is expected to try to mitigate the damage by promoting iPhone alternatives, such as cheaper devices that use Google's Android mobile software, said Mark Lowenstein, a former Verizon executive who is managing director of consulting firm Mobile Ecosystem.

Others hurt in the unfolding iPhone tale may well be rival carriers Sprint Nextel Corp. and T-Mobile USA. There are no indications that Apple plans to make an iPhone for either of them. Without Apple, their subscriber rolls could fall in 2011 by 650,000 and 950,000, respectively, Hodulik said.

AT&T has been getting ready for the day that Apple shares the iPhone with another carrier. Over the past year it has played a carrot-and-stick game with consumers. In part by easing the cost of upgrading to Apple's new iPhone 4, it enticed 15 million of its 23 million iPhone subscribers to sign new two-year contracts. Meanwhile, in June, AT&T raised early contract termination fees from $175 to $325, giving users a reason to think twice about switching.

"We are the industry leader in smart phones," said Fletcher Cook, an AT&T spokesman.

IPhone users with AT&T service can make a call and use the Internet simultaneously - if, for example, they want to search for a restaurant while continuing a conversation. Verizon's network is based on different technical standards, which don't permit this kind of multitasking. In addition, AT&T's network offers greater speed when sending e-mail, surfing the Web or playing online games, according to Global Wireless Solutions in Dulles, Va.

Bragging rights?

"We operate the nation's fastest network, and we plan on making it even faster," AT&T's Cook said. Through the end of the third quarter, the company had boosted capital spending on its wireless network by 55 percent last year. The advantage of greater speed comes into play only when a user has steady cell coverage. When there are too many iPhone users relying on the same tower, some are likely to get dropped.

On Dec. 6, Consumer Reports published a survey of 58,000 readers who ranked AT&T as the worst wireless carrier for customer satisfaction - and by an even wider margin than its finish in 2009. The company brought up the rear in quality of calls, access to the Internet and customer service.

Last place

"AT&T," noted the Consumer Reports editors, "is now positioned in last place overall and in almost every market we rate."

Verizon has largely avoided coverage snafus while handling soaring demand. It has invested in powerful cell tower gear and new fiber-optic lines to connect the towers to the Internet.

"Even if Verizon's iPhone customers go wild next year, (the carrier) can easily handle the capacity," said Michael Howard, co-founder of Infonetics Research in Campbell.

4G revolution

Verizon has also taken the lead in introducing 4G service, which offers faster speed than today's 3G networks. Verizon recently began selling 4G service in 38 markets across the country, and it owns more of the wireless spectrum than AT&T. (AT&T's $1.9 billion deal announced on Dec. 20 to buy additional spectrum from mobile chipmaker Qualcomm will help close the gap.)

While both AT&T and Verizon have staked their futures on 4G, neither will have broad-based coverage for the new technology anytime soon.

"Right now, it's like we're in a snow globe that's been shaken up," said Roger Entner, an analyst with the research firm Nielsen. "In six months or a year, everything will settle down as these new (4G) networks come on line."

Only then will discerning consumers really be able to compare AT&T's iPhone service to that of Verizon. And only then will the cost of AT&T's loss of its exclusive hold on the iPhone be clear.


01.01.2011
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