Apple's iPhone a 'game changer'

By MarketWatch

While AT&T executives talk confidently about gaining market share in the wireless business after the iPhone is released, skeptical rivals have reserved their fire.

Verizon Wireless, Sprint Nextel (S, news, msgs) and T-Mobile USA all say they are prepared for the iPhone, but none has offered a clear strategy to combat the introduction of the highly anticipated device.

"I'm not sure it is wise to pick on a particular product and say, 'This is the product that we want to compete head to head with,'" Denny Strigl, Verizon's chief operating officer, said last week. "It does not make a lot of sense to me."

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Apple (AAPL, news, msgs) has designated June 29 for the debut of the wireless device, which will work only on AT&T's (T, news, msgs) network. The iPhone is a first-of-its-kind mobile handset based entirely on a touch-screen design and AT&T has repeatedly called the iPhone a "game changer," saying more than 1 million potential customers have made inquiries about the device. Many of them have declined to re-sign annual commitments with their current providers so they'll have a chance to check out the iPhone, AT&T executives say.

"We believe the big shift that will occur is it's going to be an opportunity to take share," John Stankey, AT&T's group president for operations, told investors Tuesday at a Bear Stearns conference.

Certainly AT&T could use a big winner. Although it is the nation's largest mobile operator, with 62.2 million subscribers, Verizon Wireless has been gaining fast.

Verizon Wireless, a joint venture of Verizon Communications (VZ, news, msgs) and Vodafone Group (VOD, news, msgs), has out-gained AT&T by an average of 220,000 customers each quarter since the beginning of 2006. Verizon now has 60.7 million mobile customers.

Verizon also generates higher total revenue from its wireless business than AT&T, and the company's customers spend more: $50.73 per Verizon user compared with $49.21 for AT&T's, according to data from company reports.

Banking on loyalty

Because the iPhone is a data-intensive device -- Web surfing and music playing are two of its most crucial features -- AT&T expects customers who choose the device will spend more each month. Data plans are priced significantly higher than voice-only service.

AT&T executives also figure that iPhone users will prove more loyal, helping the company to cut its annual churn rate of 1.7%.

Churn, a key measure in the wireless business, reflects the percentage of customers who cancel service. Verizon also leads in that category with a 1.08% churn rate.

Rival executives know Apple and its iPhone pose a serious threat. They've even put a positive spin on the device's introduction, saying awareness of the iPhone could create broader consumer demand for handsets that play music or offer speedy connections to the Internet.

"We've been anticipating, as the industry has, the coming of the iPhone," Sprint Chief Executive Gary Forsee acknowledged. Added Strigl: "I think they will have a good product. So I don't deny them that."

Cheaper alternatives

Nonetheless, rival operators and handset makers have expressed skepticism about whether the iPhone will truly shake up a wireless market in which the vast majority of consumers pay less than $100 for the handsets they own.

They point to the iPhone's $500 starting price tag and note that consumers would also have to sign up for more-costly monthly plans.

"It's an expensive device," Forsee said. "If the customer is buying that for music, then we're going to be able to provide very significant alternatives to that at a much cheaper price point."

If Forsee's skepticism is misplaced, Sprint Nextel has the most to lose. The company has lost thousands of its best customers over the past year to AT&T and Verizon, and its churn rate remains stubbornly high.

Since the start of 2006, Sprint has added just 3.56 million net customers, most of whom signed up through less profitable wholesale channels or subscribed to its cheaper prepaid service.

In the past three quarters alone, Sprint has lost more than 700,000 highly valued postpaid subscribers -- those on yearly plans who pay their bills at the end of each month.

By contrast, Verizon has added 9.4 million net customers during the same period, almost all of them postpaid subscribers signed up directly by the company. AT&T added 8.3 million net customers.

Even T-Mobile, the nation's fourth biggest wireless operator, has outpaced Sprint by adding 4.3 million net customers over the past five quarters.

Verizon is not immune either, but the company's relatively high consumer-satisfaction rating and the perception that it operates a superior network could mitigate losses over the iPhone.

But just in case the iPhone proves to be a huge hit, Verizon executives are plotting out their response.

"You will see you will see more products from us by year-end, so stay tuned," Strigl said.

This article was reported and written by Jeffry Bartash for MarketWatch.