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Verizon back at bat: Revisiting the last inning

A month ago I wrote an exposé on the problems I felt Verizon was facing with their smartphone strategy: Verizon Strikes Out in Smartphones [Updated]

Given new information on subscriber growth and the relationship between Verizon and Apple, it’s time to look back and assess how the conclusions are standing up.

The conclusions I drew were that Verizon had three strikes against them:

  1. The iPhone has stolen their growth
  2. They are facing the prospect of a single OS platform supplier
  3. Android is not competitive vs. iOS

Did iPhone really hurt Verizon?

I pointed out that based on retail sampling data from ITG and what we know from AT&T own sales data, that iPhone at AT&T was outselling Android at Verizon by a ratio of 2.5 to 1.

The latest comScore data closely matches the assumed units of Android shipped by Verizon. Here’s why: The comScore data shows the number of active users of each platform. So, for example, as the number of Android users at Verizon grew, it follows that the new users had to buy new Android phones. However, you can also sell more phones than just those for new users. Some phones are going to go to replace those of existing users.

When it comes to Android however, all the Verizon Android devices are pretty new, having been purchased less than a year ago. Replacements would only be sold for damaged or lost devices not covered by warranty.

So from comScore the change in subs at Verizon comes out to about 2.2 million and my original estimate was about 2 million. That’s pretty close.

On the other hand, if you look at the chart, you’ll notice that the number of iPhone users at AT&T grew by a similar amount (about 2 million). However, AT&T activated over 5 million. That means that about 3 million devices were upgrades. This makes a lot of sense since we know that iPhone is the bulk of AT&T smartphone users.

This is highly supportive evidence that iPhone at AT&T did indeed outsell Verizon Android by at least a factor of 2. Each of those phones came with a 2 year lock-in so indeed AT&T did manage to “steal” growth from Verizon.

Another data point in support of this conclusion was provided by Turley Muller in a comment.  AT&T smartphones make up a significantly higher proportion of contract subs at 44% vs Verizon at 23%. Effectively, as a result of their sweetheart deal with Apple, AT&T got double the penetration of smartphones than Verizon since these devices are targeted only to contract subscribers. Those are high ARPU customers that either moved from regular voice plans or switched from other carriers.

So far, the first conclusion seems to be holding up pretty well.

Was Android a strategic constraint to Verizon?

Verizon revealed that they had been negotiating with Apple at least since 2008 and that they were testing the phone for a year. This is not as big a surprise as it may seem. Deals of this kind easily gestate for years. The commitment may not be made until the last minute.

Nevertheless, my point was about the fact that Android was making up to 75% of Verizon’s smartphone volume in Q3. This might be a strategic constraint. But “so what?” you may say: AT&T’s dependance on iPhone was even greater.

That’s precisely my point though. As we’ve seen with the shift by Apple to multi-carrier distribution, AT&T is now facing serious constraints on growth and the share price is suffering. Although Verizon did not deal with Google as a direct supplier, they were at risk of having much of the IP on their network at least orchestrated by a company that was not always aligned with their strategic goals. Much the same predicament AT&T is facing now.

The tale of AT&T and iPhone does lend support to the premise that Verizon felt a bit too constrained by Android hegemony on its network.

Is Android Competitive with iOS?

This last point was supported by the data showing a widening higher sell-through rate for iOS vs. Android on comparable addressable markets. Although the data has been confirmed with survey data, there are issues with this interpretation. First, because the addressable base for iPhone is higher at AT&T with the post-paid contracts being more popular there, iPhone had an easier time getting sold. Second, because 3/5 of the phones were upgrades.

The jury is still out but the apparent pent-up demand (admittedly anecdotal) for iPhone on Verizon does seem to show that given similar pricing, and a similar demographic/geographic addressable market, people do prefer the iPhone.

  • geoff

    Correction: you say Verizon "had been negotiating with AT&T at least since 2008 ". Should be Apple.

    • asymco

      Thanks, fixed.

      • http://twitter.com/artman1033 @artman1033

        still not fixed Horace!

      • guest

        not ?!?

      • Chris

        It still reads "Verizon revealed that they had been negotiating with AT&T at least since 2008 and that they were testing the phone for a year."

      • asymco

        The page is in cache. Give it some time. It's certainly fixed on the server.

  • Stark Ravin

    Android is a supplier driven phenomenon, not a customer / end-user driven phenomenon. It's that simple. If Verizon hadn't marketed Android so aggressively to fend off the iPhone, Android would still be wallowing in the smartphone ghetto that it's claptrap implementations on commodity hardware profess to.

    • dchu220

      Hey Stark. By buddy recently told me that the Foxconn factory in Shenzhen is running at max output. They are still hiring anyone they can and the trucks are flying in and out 24/7. He doesn't see any dip in demand for Apple products at the moment.

  • Priit

    At least Apple thinks that Android is very comptetitive with iOS! Frankly, I didn't expect them ever introduce dead technology hardware, but they did, and at the very end. So I got lot of downvotes at some other theme where I said Steve is scared. Boy I was wrong, Verizon iPhone proves that Steve is literally shitting in his pants.

    • ChuckO

      I don't know, Apple went first to Verizon with the iPhone so part of your argument evaporates there. As to shitting his pants, i doubt it, you'll notice Apple made no concessions to Verizon to make this happen. You may also want to read Asymcos article as to why this might be the case.

      Also there is a rather large CDMA network in China Apple is probably interested in and I think Australia as well.

      • Horace the Grump

        @ ChuckO… Telstra switched off its CMDA network in Australia back at the start of 2009… So China (China Mobile) would be the only major market outside of the US that has a lot of CDMA subscribers…

      • timnash

        China Telecom, which is much smaller than China Mobile and took over China Unicom's CDMA subscribers, would be the only China network that could use this iPhone.

    • asymco

      Your accusations of Apple's bigotry with respect to Scandinavia pale in comparison to your bigotry with respect to the far larger CDMA market.

      • Priit

        I would have understood if Apple had introduced something special for China, actually they did and that's ok. CDMA version for China would not have earned single comment from me. But I have not seen Apple doing feature requests and introducing dead technology for US markets. Also I haven't noticed them doing desperate things to gain marketshare in US either. So why now? This IS new.

        The most desperate feature request I'm afraid waits us with iPad2. I'd like to be wrong, but now it seems that iPad2 will have rear camera. Front one I understand, but rear camera for a heavy 10" device is nothing more than desperate try to achive feature parity with Android craptablets. And this, if real, is something I never-ever thought Apple would do. Unless they are very-very scared of Android.

      • dchu220

        You are calling a company desperate because of a rumor you've heard.

        I think you are desperately reaching.

      • Priit

        Perhaps. I HOPE that iPad2 does not have rear camera.

      • unhinged

        Why would Apple create a CDMA phone for China and then not maximise that phone's potential by selling it through other CDMA-based carriers elsewhere in the world?

    • Steven Noyes

      It is questionable that Apple is "scared". They are hungry as any good company is but it looks like:

      1) This is the first Verizon phone with no Verizon logo plastered on it.

      2) It has no preinstalled crap-ware on it.

      This is a very unique thing compared to every other Verizon Smartphone out there. Based on this, It looks like Apple was strong on their negotiations.

    • http://twitter.com/tommy4490 @tommy4490

      Sorry! My mistake: I hit the thumbs up button on yer post by mistake. Shoulda been thumbs down!

      • Priit

        Shit happens.

    • capnbob66

      One of the very best things about this blog is the absence of knee-jerk idiots such as yourself prone to babbling hyperbole like "shitting in his pants". You are the worst kind of troll and not worthy of this intelligent and thought provoking blog.
      I hate to feed the troll but if you actually comprehended any of the posts on this site you would see how your comment is absurd, unfounded and merely inflammatory. Apple is not scared of Android since it does not reduce Apple sales (they sell every phone they can make), has not impacted margins (obviously) and iPhone still leads in customer satisfaction, quality etc. iPhone is maintaining market share which means that is is growing at the very rapid market rate (not stagnating). For one phone on one carrier (in the US) at the very high-end of all phones in price terms, that is little short of amazing. Apple/Steve have nothing to be scared of. The Droid makers are basically fighting each other and competing with non-use for the most part. They are making precious little money from it and not giving the customers significantly better deals on equivalent hardware (or in plan terms). Apple is far from scared, it is now the other way around…
      Not that you care, troll.

      • Priit

        Still. Mac versus PC is winning, constantly, year after year. Do you see any desperate tricks? No, none whatsoever. On computer market Apple is calm, does great things, drops dead technology early, pioneers new technology. No panic at sight, great execution. They are doing their own thing, not caring of competitors. Now turn 180 dergrees, enter iOS market. This makes me wonder.

      • capnbob66

        Mac vs. PC is winning? Yes, in terms of profit share, growth etc. but that is in a mature market with low overall industry growth. Apple's overall PC share is very low so it has lots of room to grow vs. PCs. Most observers would say that Mac does not innovate in new hardware so much in Macs and is rarely ahead of the PC curve (e.g. no Sandy Bridge, USB3, BD, etc.)
        iPhone is also winning by the same terms… profit share (>45%), growth vs. every other platform except Android, etc. It is doing it at 25% market share instead of 5-10% for Mac. CDMA is not a u-turn, just an acceptance that there is a reasonable market segment that Apple should be in and will sell an incremental 6-9M iPhones this year. They never said they wouldn't do CDMA, this is no u-turn. It just took this long to cut a deal with Verizon that Apple would accept. They also appear to be doing deals with China/India CDMA networks too.
        Again – you fundamentally misunderstand the messages coming out of Asymco for the past year or 2.

      • Priit

        You call adding 3rd party shelf components (Sandy Bridge, USB3, BD) an innovation? Oh dear. Magsafe, unibody, multitouch trackpad are innovations. Pulsing sleeplight is innovation.

        What comes to the "reasonable market segment" then I agree, there's no need to argue about that, the on and only newsworthy thing (to me) is that afaik Aplle has never acted in that way. Take iPods, many wanted FM radio, Ogg Vorbis, other things. Nope, Apple didn't listen. Every damn reviewer mentions lack of connections on Apple laptops (just 2, not 4 as for others usually). Or begs for docks for laptops. Apple does not listen. Blu-ray. No way. One can argue that all those hardware request would add "reasonable market segment", but Apple does not care, does not change their principles (btw I would not add 4 usb's to the laptop too), but suddenly, with iOS they seem to bend. An I wonder why.

      • capnbob66

        Apple do some Mac innovations but often hold back from the cutting edge. You are confusing bending to consumer pressure (which Apple rarely does) with coincidence of an Apple strategy and geek demands. Apple has a strategy and sticks to it mostly. We agree. You are grasping at straws if you think that this (CDMA iPhone) is some odd u-turn and off-strategy. It just isn't.
        BTW Apple did add FM radio to some iPods.

      • dchu220

        I wouldn't be surprised if Apple had a CDMA iPhone in their labs since day one, just as they always had an intel version of the Mac while they were still on PowerPC. Their exclusivity deal with AT&T ran out this year.

        Maybe the question is why wouldn't they have launched it?

      • Priit

        The answer lies with Blu-Ray. Is there anybody who does not think that Apple had Blu-ray support since day one? But they sit on that to the end. Also, if AT&T deal ran out, then why not T-Mobile? I do know Verizon is lot bigger, but T-Mobile is 10 times easier.

      • dchu220

        I'm sure Apple has Tested Blu-Ray in their lab. I believe Steve Jobs said that he thinks Blu-Ray is going to have a short lifespan. From the new MacBook Airs, you can see that they are making a bet that the optical drive is going away. We will see if they are right. I never use my optical drive… Well that's not true. I used it to upgrade to Snow Leapord.

        Why they aren't going to T-Mobile? Who knows. Maybe it was part of their agreement with Verizon.

        What does any of this have to do with Apple being scared?

    • dchu220

      I didn't know people shit their pants when they make a ton of money. No wonder business men all wear dark suits.

  • John

    Apple has been talking with Verizon since before the iPhone first came out. I think this is another exame of Apple’s discipline. Some criticize Apple fir being slow to introduce features and products. I think it shows that Apple does not act rashly. They set their goals and work toward them in a deliberate fashion.

  • RobDK

    Well the evidence does not show Apple being scared:

    1 No preloaded V-Cast bloatware.

    2 No preloaded Verizon Apps.

    3 No Verizon logo on iPhone.

    4 All the usual iTunes, App Store, FaceTime etc.

    All in all it seems that Apple won game, set and match, and Verizon meekly accepted!

    • r00tabega

      Bigger story: This after Verizon pretty much got whatever they wanted from Google … free OS, Carrier and Manufacturer control, unremoveable apps like VCast store, no Android iPod Touch competitor (as that would cannibalize the more lucrative and expensive smartphone).

      All this and they still give Apple whatever they want (in addition to the above, Apple didn't even design a new phone for VZ, just an iPhone4 with CDMA and different antenna)… Apple is the clear winner here.

      • asymco

        Good subjective angle here. Verizon even built Bing into Android phones as per Microsoft agreement. Meanwhile Phil Schiller said there are not even any Verizon apps shipping with the phone. Any Verizon apps must be downloaded separately. The hotspot is a setting not an app. There is also no Verizon logo anywhere, unlike any other VZ phone. The line from Apple is that the product must have identical experience for all users (technology permitting).

      • Horace the Grump

        Yes, you can easily see Apple sitting at the table holding just about all the cards… sure they would like more profits and more iOS devices out there, but they are not going to die in the ditch over it. I would suspect that Verizon have been pleading with Apple for the best part of 2 years to get the iPhone… And Apple could pretty much set its terms as it saw fit.

    • rsw

      The most interesting point to me was that Steve didn't bother to show up at the event today and instead sent a trusted Lieutenant. That speaks volumes. When a Verizon underling told him to pound sand back in 2006, little did he know that Steve would get the last laugh…

    • kevin

      I bet Apple also insisted that Verizon not make an announcement at CES (even at the Thu keynote), but rather issue an invitation on CES Friday for a special announcement afterward.

  • Steko

    One thing that hasn't been mentioned enough is that AT&T was about to surpass Verizon in total subscribers. They have a lot invested in being #1 and this should keep them there (or get them back if AT&T managed to leapfrog them last quarter).

  • Steko

    Also I'm curious if the new form factor with the improved antenna positioning and moved buttons will be seen in GSM iphone 4s produced from now to June.

    • Horace the Grump

      I see this as a short term thing… We are all expecting the iPhone 5 out mid year and it keep manufacturing costs under control I would expect that there would be no difference in form factor between GSM and CDMA save for the sim card drawer on the GSM phone… So no change in the design of the GSM phone until iPhone 5 hit the market

  • davel

    You make 3 very good observations.

    I think you made a strong case for confirmation of the first 2 items.

    I think point #3 is not correct. I believe that Android is competitive with iOS. If not Android would not have the fantastic growth it has had in the past 2 years. Note that Windows mobile could not compete with iOS, but Android could.

    Android with 2.x has successfully copied the essential features of iOS that allows consumers to make a choice to buy an Android phone and be happy. The reports I have seen show Android has a pretty high satisfaction rate.

    • http://twitter.com/judsontwit @judsontwit

      Regarding #3: an interesting hypothesis in the comments by @Stark Ravin is that Android's competitiveness comes from the fact that Verizon pushed it commercially, not because of an inherent product equality with iOS. (Although it can still be argued they are equivalent, just that the equivalence was not what made Android successful.)

      Recall in this case that Android and Windows Mobile have a similar licensing model (the only difference being the price – Android, free). It has been proven time and time again that the success of a product in the market often has to do with the business model, and little to do with the product itself.

      From this, you could argue in the extreme: Android phones are selling so well, just because that's the only smartphone platform carriers sell, besides Apple. (Aside from Blackberries, but no one here is arguing they compare to Android or iOS.)

      There are many "features" that the iOS system has, that can be argued Android cannot duplicate. Likewise in the reverse. Quotes are not for sarcasm but because the meaning meant is non-intuitive to the usual definition of "feature".

      • Davel

        I am curious, what features does android have that do not exist in iOS?

      • http://twitter.com/judsontwit @judsontwit

        I was playing Devil's Advocate. As I do not use Android, I wouldn't know for certain.

        But, direct integration with Google's Voice and GMail services are definite pluses – you can swap out carrier SMS for GV SMS. Very nice.

        As always, I hear Google Navigation is a great value for the money.

      • r00tabega

        Also not a droidite, but voice controls on Android are way better (still.. noone has a "redial" command, wtf is up with that?). Also notifications and lock-screen on iOS are not as good (no widgets, can't review past notifications, etc). Finally no swype… again, best use is for passcode entry… though a redesigned lockscreen would invalidate that need.

    • asymco

      I also have my doubts on the validity of the third conclusion. But not because of any qualities of either product. The problem is that we haven't seen the two competing in a direct head-to-head competition for a single purchase decision. The closest I can come to is simulating this competition across two operators (Verizon vs. AT&T) who have similar customer bases (but perhaps not similar enough).

      Growth in one or the other is not a sufficient indicator of competitiveness of either.

      • Davel

        One more thing. I find the introduction of apple on vz to be compelling. It is a great case study of Substitute goods. I am curious how both options will be embraced by consumers.

      • r00tabega

        On Feb 10th, we'll start seeing that in action… can't wait to see how that turns out in aggregate.

    • FalKirk

      "I believe that Android is competitive with iOS. If not Android would not have the fantastic growth it has had in the past 2 years."

      We don't know if Android is competitive with iOS because Android hasn't been competing with Android iOS. How can I make such an outrageous statement? Remember, Apple sells every single iOS phone they make just as fast as they make them. If Android didn't exist, Apple could not have sold one single more phone than they have. If this were a game of football, it would be like both iOS and Android were scoring every time they touched the ball.

      But this is not a game like football. Imagine instead, a giant game of Risk. Apple is on the left side of the board and Android is on the right. RIM, Nokia, Windows Phone 7 and webOS are also on the board, but mostly the center of the board is covered with dumb and feature phones. On every turn, iOS and Android win every battle they face, but still about 60 to 70% of the board is filled with these hapless dumb and feature smartphones.

      We're not going to know for sure which is the superior mobile OS until all of the dumb and feature phones are swept away; when we stop playing a win/win game where every smartphone OS can grow without impinging on the growth of their competiors; when the market stops expanding and when, for one smartphone OS to grow, it has to take share from another smartphone OS.

      • Davel

        I agree, there is no causality. My statement is based on anecdotal evidence. It seems to me android and apple are in direct competition. People I know who are looking to purchase a smart phone discuss the pros and cons of each. Sometimes win7 or palm may enter the discussions. As stated above having both on the same network makes a fascinating case study.

      • http://twitter.com/judsontwit @judsontwit

        But are they taking new territories on the board…

        Or are they just merely packing tons of new soldiers into British Columbia and Kurdistan? :)

    • davel

      Apparently Verizon will make a big advertising push for iPhone. It will be interesting to see how much they push Android and iPhone and how they position the different platforms.

      Verizon has been very cagey in the past year or so in not criticizing the iPhone directly, but criticizing the network they were on.

  • CndnRschr

    It's a question of what you want. Android offers a more open ecosystem and that comes at the expense of a number of things. iOS apps look and feel more polished whereas Android apps tend to be rougher but more varied (and often only advertizing-based). The interaction with the interface is also different. Android is still rougher around the edges (maybe this is a reflection of the implementation, not the OS?). The Apple ecosystem is far more closed and protected but updates get pushed to everyone whereas Android updates (unless you root) are often haphazard in their timing and sometimes never appear. Android may have copied the features of iOS but that doesn't mean a clone of Elvis can sing like Elvis. Moreover, Android has brought several innovations that iOS still doesn't have (such as OTA syncing). These are two healthy and competitive variations that both work and appeal in different ways to different people. This is good for everyone.

  • poke

    Could it be that Verizon's problem was that their current rate of promotion for Android just wasn't sustainable in the long term? Android growth looks good to us but Verizon knows more about how many of those phones were sold through 'buy one get one' promotions, how much they were paying to get manufacturers handsets on their network. and how much they were spending on their Droid advertising campaigns. Perhaps it just wasn't sustainable to keep promoting Android at that level. (I'm also suspicious as to how involved Google was; I've read that Google has been paying carriers a share of their search revenue, although I can't remember the source, but perhaps they had a bigger deal going with Verizon to promote Android there.)

    • Davel

      My question is how is ATT able to beat VZ every qtr on new mobile subscribers with an inferior platform?

      I think VZ needs Apple to blunt ATT. We shall know soon enough.

  • Steko

    "If not Android would not have the fantastic growth it has had in the past 2 years."

    For the most part Android is winning battles the iphone has decided to opt out of fighting. Android's fantastic growth is coming from new markets and other handset platforms.

    Saying Hyundai is not competitive with Bentley is absolutely correct. This does not mean that Hyundai will not experience amazing growth.

    • Davel

      Yes. My problem with android is the lack of hard sales numbers. Apple reports theirs on total and region. Other manufacturers report regular and other phone sales. It is hard to do an apple to apple comparison.

  • 21tiger

    "Android offers a more open ecosystem and that comes at the expense of a number of things"

    What's the advantage? Pirated NES emulators? There's that word 'open' again, that seems to mean nothing..

  • Davel

    I agree. Open is a false idol.

    • dchu220

      Open is just a strategy. It is neither good nor bad. It works great in some cases, not so great in others.

      Great CEOs know when and when to to apply 'open' strategies.

    • r00tabega

      Open as in Flash.
      Open as in firmware anti-tamper.
      Open as in "you still have to license access to Google services/apps".

      You have to admit, Open is great sell for the carriers and manufacturers, though.

      • dchu220

        Hey r00tabega. I know 'open' has a fuzzy definition, but there are also positive open examples.

        Open as in lots of companies modifying ARM chip designs.
        Open as in Mozilla Firefox
        Open in that fact that we can have this disucssion right now

        The basis of the theory of disruption is that when things aren't good enough, closed or integrated systems perform well. And when things are good enough, open systems have an advantage (because customization is more important to the customers).

        Even Apple has open-sourced some of it's technology when it thinks it is a better move.

      • r00tabega

        Let me rebut your points:
        > Open as in lots of companies modifying ARM chip designs.
        You mean licensed? ARM licenses aren't free, nor are they without limitations.

        > Open as in Mozilla Firefox
        This is open-source. That is a well defined term as opposed to the vague term "open", which has about 100 different meanings in different contexts… plus the term "Mozilla Firefox" is trademarked, so the source code is open, but the name is not (google: iceweasel)

        > Open in that fact that we can have this disucssion right now
        Again, that's free speech, not "Open". This is a moderated discussion board, where you have to somehow authenticate to comment and abusers will be removed/banned.

        It seems you think open applies to everything, therefore what is it's meaning? I think the conflation of terms and the looseness with which "open" is tossed about has diluted it's value (especially recently). The organizations who fling it around aggressively (HTC, OHA, Verizon, Motorola) are all big on non-open, non-free as well.

      • simon

        Excellent point there. Open is essentially a meaningless term that somehow came to be used to imply a morally superior ideal in software. Shrill backers of Android love to emphasize and yell OPEN! at every discussion of mobile platforms.

        If they are truly enthusiastic about open software, one would think those lovers of open software also strongly support Symbian while rejecting Google's suspicious fondness toward Flash as well as showing reluctance to use Google's closed source, license-requiring proprietary built-in Google apps. Yet none of them is true.

        As we've just witnessed with Google's action toward H264, open is an entirely meaningless term that's brandished only when it's convenience for them. Nowadays it's usually by Google and its followers because they are the one who's set to profit from open software the most via their ad revenue.

      • davel

        my understanding is android is not truly open

        yes it is based on linux but no one but google can look at the source until it is released.

        this seems counter to traditional open systems where everyone has access to the code always.

      • dchu220

        There are also example of positive 'open' strategies.

        Open as in many manufacturers modifying ARM chip designs to optimize their products.
        Open as in Mozilla Firefox
        Open as in our discussion right now.

        Apple opens itself up when it thinks it's right. E.g. Webkit, XCode, FaceTime.

      • r00tabega

        dchu220,
        Apple doesn't fling around the word "open" as some sort of moral standard, so their mixed use of open and proprietary models and code is consistent.

  • timnash

    With iPhone, Verizon has a much better chance of marketing its better network coverage. Now it can claim you can get the phone you want on a much better network and cut down on incentive deals like BOGO except to clear stock). The iPhone should improve the revenue per user and reduced incentives will improve margins.

  • H Ghanem

    I think this is a win win situation. AT&T is almost saturated with iPhones and Apple needs access to the 90 million customers of Verizon. At the same time for Verizon to continue being #1, Android will not do it for them and they will need iPhone in their arsenal. I really believe both parties are winners and the bigger winners are the customers.
    One more thing, this mean that iPhone exclusivity is out of the door in the US and we could even see more carriers having iPhone in the future.

  • http://twitter.com/Niilolainen @Niilolainen