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Originally published January 11, 2011 at 8:04 PM | Page modified January 11, 2011 at 8:59 PM

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Verizon faces challenge adding iPhone to its network

With Verizon Wireless poised to start offering the iPhone, a key issue for consumers is: Will the popular device cause the network the same kind of problems it did at AT&T?

Los Angeles Times

With Verizon Wireless poised to start offering the iPhone, a key issue for consumers is: Will the popular device cause the network the same kind of problems it did at AT&T?

Although more than 73 million iPhones have been sold worldwide since Apple introduced the smartphone in mid-2007, in the U.S. its sole carrier — AT&T — has weathered complaints from users about slow performance and dropped calls.

The phone, which will be available Feb. 10 on Verizon's network, has data-intensive features such as the online game-playing and streaming that have been blamed for AT&T's woes. Analysts have warned that if Verizon's not careful, it could be in for the same drubbing.

But when it comes to the iPhone, Verizon has a key advantage over AT&T: It didn't go first.

"AT&T had to go through quite a bit of pain in order to understand what the demand of those customers actually looked like," said Charles Golvin, an analyst at Forrester Research. "But Verizon has already gone through that learning curve — first from watching AT&T and second from watching people on their own network use these data-intensive devices."

Verizon's roster now includes an array of Google-powered Android smartphones built by manufacturers such as Motorola, HTC and Samsung. Over the past year, Android phones have proved to be tough competition for AT&T's iPhone.

Still, the iPhone is expected to add considerable strain to Verizon's network. Analysts expect the carrier to sell as many as 12 million iPhones in 2011.

"We don't offer devices our network is not prepared to support," Verizon spokesman Ken Muche said Monday.

AT&T sold an estimated 15.6 million iPhones in 2010, according to Piper Jaffray analyst Gene Munster.

This year, Munster estimated, Verizon stands to "cannibalize" the sales of 6.5 million iPhones that might have been sold by AT&T.

In December, Consumer Reports rated Verizon the best mobile carrier — and AT&T the worst — in 16 of 23 of the cities it surveyed.

"When we compared the data on satisfaction for iPhone owners (on AT&T) and smartphone owners on Verizon, there was no comparison," Paul Reynolds, the magazine's electronics editor, said before the iPhone announcement.


"That said, we also know that iPhone owners are the heaviest data users," he added. When Verizon gets an iPhone, "they're going to get a lot of stress to their network."

Reynolds and other observers were not convinced that Verizon would be immune from the same issues that have dogged AT&T.

"There will be a flood of customers," said Richard Doherty, research director at the consulting firm Envisioneering Group. "But we're not sure the Verizon network is going to be the panacea that a lot of consumers are expecting."

At the same time, with AT&T's exclusive hold on the iPhone in the U.S. ending, other carriers besides Verizon could be knocking on Apple's door as well.

Bellevue-based T-Mobile USA, for instance, would like to offer the iPhone on its network, which uses the same sort of wireless technology as AT&T.

T-Mobile's new chief executive already has a relationship with Apple. Philipp Humm previously led T-Mobile's business in Germany, where he introduced the iPhone in 2007.

"We would be interested in offering the iPhone, but ultimately it is Apple's decision," a T-Mobile spokeswoman said.

Meanwhile, AT&T seems to be mounting an effort to hold on to its iPhone users, who have complained widely online about the carrier's service. Some customers have said they plan to jump to Verizon, even through they'll have to pay several hundred dollars to get out of AT&T contracts.

AT&T has focused on what it said was the slower speed of Verizon's network. In November, the company released a study noting that its network was 60 percent faster than Verizon's. Verizon has not denied the claim.

On Sunday, AT&T spokesman Larry Solomon said, "I'm not sure iPhone users are ready for life in the slow lane."

Google may lose business as well when Verizon starts selling the iPhone, which will compete with smartphones running Google's Android operating system.

The Verizon iPhone may cannibalize about 2 million Android shipments a year, said Dan Hays, partner at consulting firm PRTM. Electronics research firm Gartner Inc. said 20.5 million Android phones were sold in the third quarter.

"A lot of people who bought Android phones were buying it in lieu of an iPhone because they couldn't get one on the Verizon network" said Charlie Wolf, a Needham & Co. analyst.

At AT&T the iPhone accounted for 80 percent of smartphone purchases in the third quarter, said Gene Munster, an analyst at Piper Jaffray. If that's any indication, many Verizon customers will pick the iPhone over Android devices.

Apple may do a better job than Google in helping get more Verizon users to switch to a smartphone for the first time, said Carl Howe, an analyst at the Yankee Group. About 38 percent of AT&T customers use a smartphone, compared with about 30 percent of Verizon's, he said. iPhone users' bills are about $120 a month, compared with about $40 to $80 for users of a regular feature phone, according to Howe.

"If they can get people who are currently on feature phones to upgrade, that would be huge because smartphone users pay a lot more," Howe said.

Verizon may spend $3 billion to $5 billion to subsidize customer purchases of the device this year, cutting into profits, analysts say.

While the smartphone will help Verizon add more subscribers this year than rival AT&T, currently the exclusive U.S. carrier for the iPhone, it will also crimp profits, said John Hodulik, an analyst at UBS. Hodulik said Verizon may sell 13 million of the devices with an estimated $400 subsidy this year, which would add up to a total of $5.2 billion.

"You basically write customers a $400 check," said Hodulik, who rates parent Verizon Communications's shares "neutral" and doesn't own them. "We expect margins to be down pretty meaningfully in the first quarter and second quarter."

Verizon also will sell a version of Apple's iPad tablet computer that can connect directly to its network, posing another challenge to AT&T as the carrier's exclusive hold on the iPhone draws to a close.

Verizon will get an embedded chip in the iPad for use on its network, said Francis Shammo, chief financial officer of Verizon Communications, the parent of the wireless unit. iPad users currently need an extra device to connect to Verizon's network. Shammo declined to say when the change may happen.

Material from Seattle Times senior technology reporter Brier Dudley and Bloomberg News is included in this report.

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