How to Profit From Impending Launch of the Verizon iPhone

By: Money_Morning

Don Miller writes: The buzz surrounding the long-awaited release of a Verizon Communications Inc. (NYSE: VZ) iPhone is reaching a fevered pitch as it appears the telecom giant is ready to bring the device to market.

Verizon is expected to confirm it will start providing service for the iPhone early next year, according to a report last week in The Wall Street Journal.

January may be a strange time to launch the much-anticipated product, but AT&T (NYSE: T) reportedly convinced Apple Inc. (Nasdaq: AAPL) to give it one last holiday season as the iPhone's exclusive U.S. provider, according to a report in Tech News World.

With millions of frustrated AT&T network users making noise and millions of loyal Verizon customers anticipating the iPhone's release, investors are wondering if the iPhone could give shares of both Apple and Verizon a shot in the arm.

Verizon iPhone Marks End of an Era
Verizon has been testing its networks and capacity to handle the heavy data load by iPhone users, seeking to avoid the kind of bad publicity that plagued AT&T after booming sales of data-hungry iPhones crippled its network.

AT&T insists that it provides excellent network coverage and service to its wireless customers, in spite of the fact that a new Consumer Reports survey suggests they're deeply dissatisfied with their carrier. The ones who complained the loudest were users of the iPhone.

By making the iPhone available to Verizon customers Apple is striving to fend off an assault on its business from several fronts. The move is expected to help the iPhone compete in its battle with Google Inc.'s (Nasdaq: GOOG) Android handset software, which has made significant inroads on Apple's market share.

While Apple is on track to sell 40 million iPhones across the globe this year, it is under serious pressure from Android in the United States. The innovative iPhone and its operating system software package, known as iOS, was knocked from its lofty perch among U.S. technophobes by Android software in the second quarter of this year.

Android handsets, which have been heavily promoted by Verizon, had 27% of the U.S. market in the second quarter among new U.S. smartphone users, compared with 23% for iOS, market research firm Nielsen Co. said on its website

Nevertheless, introducing an iPhone to Verizon's vast customer base is likely to boost the shares of both companies.

18 Million New Customers for Apple?
Apple could double its earnings in the United States when Verizon becomes a carrier, according to some observers.

In fact, some complicated math reveals that the Verizon handset could boost iPhone sales by a cool 18 million.

Here's how the numbers add up:

•A recent survey by Changewave showed that 34% of users would purchase an iPhone if it were available on their network.
•As of the third quarter this year, Verizon reported it had 93.2 million subscribers in the United States.
•Another study shows that 57.1% of Verizon subscribers access data on their phones.
•If 34% of Verizon smartphone users switch to the iPhone, it works out to 18.09 million.
Not all of the data users will be current smartphone customers and not every Verizon user will switch devices. But a Verizon iPhone will still garner a significant number of disgruntled existing AT&T subscribers who currently put up with patchy service coverage in order to get their Apple fix.

It also may take awhile for either AT&T users or Verizon customers to make the switch because existing service contracts could keep customers locked down. Customers that break their contracts will be subject to a termination fee.

But considering that every iPhone sold represents several hundred dollars of revenue, Apple may not mind waiting 24 months to welcome an extra 18 million customers to the fold.

Verizon Profits on Hold
The addition of the iPhone should reinforce Verizon's market share lead over AT&T, which has widened since the iPhone launched in mid-2007.

During that period, Verizon has out-gained AT&T in adding customers with handset contracts, signing 14.5 million customers, compared to 12.8 million for AT&T, The Journal reported.

However, any impact is unlikely to be immediate. The iPhone's subsidy costs will probably cut into Verizon's 2011 earnings, The Journal reported.

Verizon also is pushing hard to complete an expensive roll-out of its LTE (Long Term Evolution) high-speed, post-3G network, and it's locked in a war with AT&T and T-Mobile to get there first.

Initial plans called for Verizon to release its iPhone on the slower 3G network. But if Verizon scraps the 3G iPhone for the faster LTE network, it could delay the launch into the second quarter of 2011.

"There will be a lot to pack into the new device if it's to be an LTE iPhone," Chris Hazelton, a research director at the 451 Group, told MacNewsWorld. "It will have to be familiar with Verizon's CDMA network -- it must have the entire CDMA stack...and other technologies."

AT&T will launch LTE in mid-2011, but will roll it out nationally much more slowly than Verizon. In the meantime, AT&T's ability to deliver LTE speeds will be limited by network congestion from its iPhone data use.

Indeed, with LTE's higher speeds, data use at Verizon is likely to rise further. Assuming Verizon continues to tier pricing that reduces unlimited data plans, revenue per customer should increase.

And starting in 2012, the impact of subsidizing all those new iPhones at Verizon will be minimized. That's also when the full effect of increased data revenue from its LTE network should begin to filter through.

How to Play the Launch
The impact from a Verizon/Apple deal not only will affect those two bellwethers, but it may stretch across the entire business, giving telecom companies room to widen their reach and expand their profits. Early on, even AT&T may benefit as customers who switch to Verizon reduce the load on its network, convincing some to stay.

It's tough to say if Verizon will get flooded with AT&T refugees or how many of those will stay put. And with the uncertainty about when Apple and Verizon will actually begin to reap significant revenues and profits, investors may be best served by spreading their bets around the telecom spectrum.

There are several exchange-traded funds (ETFs) that give a decent amount of exposure to the industry:

•Telecom HOLDRS (NYSE: TTH)
•Vanguard Telecommunication Services ETF (NYSE: NYSE: VOX).
•iShares Dow Jones U.S. Telecommunications Sector ETF (NYSE: IYZ).
•First Trust Morningstar Dividend Leaders Index Fund: FDL)
All of these ETFs have significant holdings in the telecom sector including integral exposure to Verizon.

For exposure to Apple and other innovators in the telecommunications industry you might consider adding technology ETFs.

While telecom is often a dividend play, technology offers relatively rapid earnings growth and a chance to ride a wave of merger and acquisition activity.

Together, telecom and tech give investors a "barbell" approach to the market: growth on one side, dividends on the other, according to MarketWatch.

There are nearly two dozen technology ETFs, including these long-only plays:

•SPDR Technology Select Sector ETF (NYSE: XLK)
•iShares Dow Jones U.S. Technology Sector Index ETF(NYSE: IYW)
•Direxion Daily Technology Bull 3x Shares (NYSE: TYH)

Source : http://moneymorning.com/2010/12/21/new-iphone-boost-verizon-and-apple-shares/

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