When I woke up Tuesday morning to the news that Verizon Wireless would offer a version of the iPhone that works on its network, the first thing I did—as I’m sure you all did, too—was gather up all my family’s iPhones and throw them into the nearby lake! Because, of course, Verizon offering an iPhone means that all other iPhones are worthless. True, I can’t get service until at least February 10, and I have to pay hundreds of dollars in cancellation fees and lose my initial purchase price for the phones. But that’s a small price to pay to get rid of bad rubbish.
OK—that’s a bit of a lie. My iPhone remains untouched, and I’m pretty sure yours does, too. But to read analysts’ opinions about AT&T’s net customer loss due to Verizon, it would appear they have apocalyptic lemming visions for perfectly good hardware. Estimated defectors range from hundreds of thousands to more than a million to several million. The low end of that estimate is possible; the higher estimate makes no sense.
AT&T will certainly lose some subscribers who stayed with the carrier or switched to it only because they loved the iPhone so mightily, and then became stuck because of early termination fees (ETFs) and the lack of interest in competing smartphones. But I don’t think the numbers add up to a massive net loss.
The customers that move to Verizon from AT&T have to shed working, valuable smartphones. Most people won’t put a device in their drawer and eat $300 to $500 between the initial cost of an iPhone and a termination fee. Those phones will be sold to other people, and become the first smartphone for someone upgrading from a lower-end featurephone (thus improving AT&T’s revenue), a switcher phone for someone taking advantage of a cheap iPhone to get onto AT&T’s network, or a new line for a family plan that already has some mix of phones. Hey, Junior! Hey, Sis! Here’s a previously owned iPhone—just for you!
First off, some numbers. AT&T has likely sold over 25 million iPhones starting in 2007, and more than 10 million of those are iPhone 4 models bought by subscribers since June 2010. Some distribution of these are on family plans, such as in my household; one estimate pegs 80 percent of smartphones being part of family plans. Some early and dead phones are retired—the original iPhone makes a great iPod touch, and AT&T’s early 2008 upgrade offer to allow iPhone 3G sales ensured piles of those EDGE-only iPhones lying around. (We have two such devices that passed through my home. One was beat up, and I couldn’t reasonably sell it, but my dad took it; he later bought an iPhone 4. The other is an iPod touch wannabe, but we have an iPod touch, and rarely use our mothballed 2G iPhone.)
Among all iPhone owners, it’s most likely that the majority of those with iPhone 3G models are outside their two-year contact term; they might be biding their time to give AT&T the slip. The iPhone 3G can run iOS 4 (sometimes very very slowly), but lacks multitasking and other features that require a 3GS or 4. Even if there’s a mass exodus of iPhone 3G owners, it would represent a few million users. Because those phones retain value, they’ll be handed off and sold cheaply. Some number will get recycled or thrown away.
The iPhone 3GS is a trickier model. With a better processor and full iOS 4 support, including support for external keyboards, these can be easily sold. A new iPhone 3GS with 8 GB is just $49 from Apple and AT&T, but this requires a two-year commitment. An out-of-contract or contract-canceled iPhone 3GS will be sold by any sensible AT&T emigré.
Some late-period iPhone 3G and all iPhone 3GS owners will also face cancellation penalties. AT&T implemented a pro-rata reduction in the early termination fee of $175 in March 2008 for new purchasers; this lasted until June 2010, just before the iPhone 4 shipped. The fee drops by $5 per month. If you upgrade, the fee can be waived if you’ve spent enough. But if you cancel service altogether, you owe the rest. For an iPhone 3GS buyer who got his or her phone in June 2009, that’s still $70 to pay in February on top of an initial $199 or $299 purchase price.
The roughly 10 million AT&T iPhone 4 subscribers face a steeper price to change. AT&T’s new ETF for smartphones, set last June, is $325, dropping $10 per month during a contract term. For folks like me, who bought an iPhone 4 on the day it was released, that’s about $245. Most people will owe more, based on the sales curve. An iPhone 4 costs $599 or $699 purchased without a contract compared to $199 or $299 with a two-year commitment, and can be readily sold.
For both iPhone 3GS and 4 purchasers who plan to defect to Verizon, the sensible economic decision will be to try to sell their phones, or hand them off to family in lieu of buying a phone. The buyers, having spent hundreds of dollars on an out-of-plan phone or received it as a nifty gift, will certainly use them. I don’t see many forgotten about, even if subscribers are disgusted with AT&T. They can be angry at the telecom firm, and still sell the phone or give it away.
And no person with enough sense to complete an iPhone 4 purchase and activation in the second half of 2010 bought it with the belief that Verizon would never offer an iPhone. Maybe some people don’t read the newspapers, see blogs, or talk to other people for months at a time, but I doubt those people are buying up cutting-edge smartphones. Every single person I know who knows that I write about technology, even people with no interest in phones, has asked me last summer about whether and when Verizon might have an iPhone made for its network.
Crunch all that together, and that leaves a rather small number of people to jump ship without having a strong motivation to sell to another user who will, perhaps, deactivate an original iPhone or pass on an iPhone 3 or 3GS.
People aren’t rational. It might be easy to forget about the original purchase price of the phone, and pretend to not see the line item in the bill for canceling service—and then swallowing another $199 or $299 in a new purchase from Verizon. In this economy, though? I have my doubts.
Verizon will surely poach AT&T customers, but can’t poach AT&T phones. The phones’ continued desirability means AT&T won’t suffer much loss in activated lines. The $15-per-month DataPlus service plan coupled with a cheap or free used iPhone and no service commitment might even mean AT&T picks up net customers because of all the iPhones flooding the market.
We’ll see. I see this as a greater-than-zero-sum game, as more subscribers of both networks move up to smartphones, and more people in a family acquire iPhones at a more affordable price. If I’m wrong, well, I can still join the crowd, and go soak my iPhones (and my head) in the lake.
[Frequent Macworld contributor Glenn Fleishman is a regular contributor to the Economist’s Babbage blog, and the editor of Wi-Fi Net News.]