Apple and Verizon: The bumpy road to love

And here we thought the apocalypse wasn’t due until 2012. If the reports spreading around the Web faster than teenage gossip are to be believed, then a Verizon press conference slated for Tuesday morning will herald the arrival of the first U.S. iPhone not bound to AT&T. And, at this point, the metric ton of corroborating sources makes this long-circulated rumor seem more likely to finally happen than not.

The myth of the Verizon iPhone has a long and tortuous history that dates back to original model of Apple’s device, and in the last several years it’s been one of the most frequently-asked questions I’ve fielded in both my personal and professional capacities. (If The Beatles appearing on iTunes were any indication, I expect my blood-pressure to go down accordingly once a Verizon iPhone is announced—at least until people fill the void by demanding to know when Apple is going to make Macs with 3D displays or iPhones with remote Pop-Tart delivery.)

Macworld will feature live coverage of Tuesday’s Verizon press event beginning at 8 a.m. PT

So, should Verizon and Apple’s relationship consummate in an iPhone, what kind of effect can we expect on the mobile phone market? Given how long and strongly a Verizon iPhone has been anticipated, it seems hard to argue that it won’t be a major seismic shift. Heck, the two companies have been the subject of more watercooler whispers than any couple since Ross and Rachel. (I would tell kids to ask their parents about that one, but that just makes me feel old.)

In expectation of Verizon’s announcement on Tuesday, let’s take a look at the road thus far and see what’s around the bend for Apple, Verizon, AT&T, and consumers.

The ghost of Verizon iPhones past

Tuesday’s expected announcement won’t be the first time Verizon has crossed paths with the iPhone. When Steve Jobs was shopping around the original version of the handset, he approached Verizon—who turned him down. At the root of the problem were issues of—surprise—money and control.

Apple wanted a cut of monthly subscriber fees and the ability to dictate the terms of sale and maintain a direct relationship with customers. Presumably, Verizon balked at such high demands from a first-time handset manufacturer bringing a totally unproven device to market. Those turned out to be concessions that Cingular (later swallowed up by AT&T) was only too happy to give up, in exchange for an exclusive lock on the device for an unspecified number of years.

Verizon, for its part, has tried to remain stoic in the face of those calling its decision one of the biggest technology gaffes of the past quarter-century. But you could almost hear its stomach sinking as the iPhone went on to become a cultural phenomenon, Apple racked up millions of sales, and—most important from Verizon’s perspective—AT&T welcomed new subscribers by the bushel, each signing a hefty two-year contract.

The first major rumors of Apple and Verizon striking a deal came in April 2009, more than two years after the iPhone’s unveiling. Verizon CEO Ivan Seidenberg told the Wall Street Journal that he didn’t think the iPhone would come to his network until Verizon began to roll out its 4G network (which, we’ll note, officially launched late last year). Later that same month, USA Today reported that the two companies were in “high-level” talks, though that report lacked any major details about a would-be deal.

Not long after that, I debated the merits of a Verizon deal, facing off against a formidable opponent (who, I must add, is uncannily handsome and intelligent). At the time, there were plenty of arguments both for and against a deal between AT&T and Verizon—though I think most of us were then assuming that Apple would have to pick one carrier or the other. Of course, Apple has said as far back as 2008 that it’s not “married” to exclusive deals and in plenty of countries around the world, the company has made deals with more than one carrier, including major markets like the UK, Germany, and France. In fact, the U.S., with its single carrier deal, has almost become the exception to the way Apple runs its iPhone business.

While Verizon rumors have surfaced seemingly every few months over the last few years, it was this past summer that the evidence started becoming too hard to ignore. For example, when Apple announced the iPhone 4 in June, AT&T said that it would extend its lowest pricing to any customer who would be eligible for an upgrade before the end of 2010—as long as they signed a new two-year contract. That was a departure from the release of previous versions of the phone, where AT&T set tiered prices depending on the current state of a customer’s contract and other factors.

At the time it was a puzzling move. Certainly, lowering prices was meant to encourage customers to buy a new phone, and thus renew their contracts, locking them in for another two years. But why sacrifice the extra money that could be wrung out of them for handset upgrades? After all, it wasn’t as if would-be U.S. iPhone owners had any place else to turn for iPhone service—even if surveys around the same time suggested that customers desperately wanted to go elsewhere.

The rumors only intensified in October when Verizon announced that it had struck a deal with Apple to sell iPads from its retail stores, bundled with MiFi wireless hotspots. Clearly, the two companies had struck a deal for some level of cooperation—but how far would it extend? As the year wrapped up, one analyst suggested that such a deal might almost be more crucial for Verizon. Still, there were obstacles to overcome before a Verizon iPhone could come to fruition.

Technology is fundamental

Make no mistake: the higher hurdles in between consumers and a Verizon iPhone are those of business, not of technology.

While Apple executives have publicly spoken out against CDMA, the technology that underlies Verizon phones, there’s no technological reason Apple couldn’t make a CDMA phone if it wanted to. In fact, there have been suspicions for some time that Apple has long had a working prototype of a CDMA iPhone, in the same way that the company secretly maintained an Intel-version of Mac OS X for years before it made the transition publicly. Those theories were bolstered last year when, during a press conference about iPhone 4 antenna issues, Steve Jobs commented that the company’s campus had its own Verizon cell site. A month later Daring Fireball’s John Gruber wrote that “the wheels are turning on N92, the CDMA variant of the iPhone 4.”

The likely reason behind Apple’s choice of GSM-based technologies, beyond the practicalities of its deal with AT&T, was that it’s used far more broadly around the world. CDMA, by comparison, is used mainly in North America and a handful of other countries. This allowed Apple to build a single phone that they could quickly roll out to many international markets.

It also allowed Apple to sell just one model of phone: there was no need to throw jargony terms like CDMA, UMTS, HSDPA, and EVDO at customers, or ask them questions beyond what capacity phone they wanted and—at times—if they wanted a black or white phone (which, granted, hasn’t exactly been a big concern lately). In fact, it long seemed to me that this would be the major sticking point of Apple going to multiple carriers in the U.S.—such a move would throw a wrench in the company’s vaunted simplicity and streamlined product matrix.

But I suppose Apple has decided that most consumers these days can at least handle differentiating between carriers. And, as most of the major U.S. carriers seem to be gravitating toward the LTE standard for their 4G networks, a CDMA-based iPhone is really only a stopgap measure. So one iPhone to rule them all may still be in the wings.

That said, potential Verizon iPhone customers may have to contend with one limitation: CDMA-based technologies don’t support the ability to simultaneously maintain voice and data connections. So if you’re trying to look up movie times while your significant other’s on the line, you’ll have to hang up and call them back.

So, why now?

With years upon years of rumors yielding nary a single real Verizon iPhone, the question on your mind might be “Why now?”

There’s a confluence of factors at work here, but the most relevant of them would be the likely expiration of the exclusivity deal between Apple and AT&T. At the time of the original iPhone’s launch, the scuttlebutt was that the two companies had struck a five-year deal, which would seem to have put the date of Apple’s freedom in 2012 (right in line with that Mayan apocalypse).

However, that was complicated by the extreme secrecy surrounding the agreement: nobody knew for sure that it was a five-year deal, nobody knew when the deal had been signed, and nobody knew which model or models it applied to. When the iPhone 3G debuted, AT&T agreed to subsidize the cost of the device in exchange for Apple giving up its cut of subscriber fees—if that required negotiating a separate deal, then any details people previously thought they knew might as well be rendered null and void. (The one thing the Mayans didn’t count on, of course, being corporate lawyers.)

From Apple’s point of view, now is the optimal moment. The iPhone is still selling well on AT&T, but there are now millions more iPhone users than there were three years ago. As such, the largest untapped segment of the smartphone market are customers who aren’t willing to sacrifice their current carrier in exchange for the promise of a fancy new device. And the biggest chunk of those folks are on Verizon, which currently holds the edge in subscribers over AT&T by a slim margin.

While iPhone sales weren’t about to start dropping—after all, where there’s a new iPhone, there are always some people who will feel obligated to replace their year-old version—there’s no question that Apple would like to expand its customer base.

And while I’m sure Apple would have been happy to wait for LTE to have reached maturity, the fact that the 4G network is in the process of being rolled out means that the roadmap for future iPhones is at least in place.

Chronicle of a death foretold?

Ah, AT&T. We knew you well—wait, AT&T’s not dead?

Not by a long shot. While many have pegged the introduction of a Verizon iPhone as a death knell for AT&T, there are plenty of other factors at play here that guarantee that Apple’s partner of the last four years isn’t done yet.

It’s true that, for the most part, the cell phone carrier market is a zero-sum game—that is to say, most people have cell phone contracts for just one carrier. There are probably a few people who have contracts with multiple providers, whether it be for work and home use or for the parents of that teenager who just had to have an iPhone, but for the most part it’s one person per carrier.

AT&T certainly has a bad rap with iPhone owners: you don’t have to look any further than the most recent Consumer Reports ranking to see that. And it’s not all undeserved: the company lagged on providing picture messaging and tethering to iPhone owners, dropped its unlimited data plans, and has had plenty of high-profile problems with clogged networks and poor performance.

Of course, this isn’t to say that Verizon will automatically swoop in and be the perfect network that iPhone owners have always wanted. Most cell phone carriers seem to be rated on par with politicians: people’s opinions of their performance and effectiveness vary wildly, but most agree that they could all stand to be a bit better.

Not to mention that there are plenty of folks who are content with their AT&T service. Macworld’s own fearless leader, Jason Snell, resides in an area where there’s no Verizon coverage, but he gets full bars on AT&T—and I’m sure he’s not alone.

And keep in mind that for Apple, which carrier you choose doesn’t matter much to its bottom line: every iPhone sale is money in the bank for Cupertino.

For its part, AT&T isn’t taking Verizon’s arrival lying down. AT&T’s Larry Solmon delivered a zinger to Business Insider about the relative performance of the two networks, saying “The iPhone is built for speed, but that’s not what you get with a CDMA phone. I’m not sure iPhone users are ready for life in the slow lane.”

And if you think that’s the last we’ll be hearing of AT&T and Verizon sniping at each other, then, well, aren’t you just darling. For my part, I hope the companies will stuff the rhetoric in favor of tangible competition that benefits the consumer in the form of better features, lower prices, and fewer restrictions.

Then again, perhaps I’m the naive one.

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