IPhone Battle: Verizon vs. AT&T

Panting for a Verizon iPhone? Read this first. We weigh the pros and cons of the two network providers

By Peter Burrows

For more than three years, iPhone owners have grumbled about dropped calls and slow service on AT&T (T), the exclusive cellular network for Apple’s (AAPL) transformative device. Now they’ll have the chance to see if Verizon (VZ) can do any better. The company recently announced it will start selling iPhones on Feb. 10. (Existing customers can pre order the phone on Feb. 3.) For those who still haven’t chosen sides in the AT&T vs. Verizon showdown, consider these points before signing a contract:

Price: Verizon customers will pay the same as AT&T’s—at least for the device itself. A 16-gigabyte iPhone costs $200, while the 32-gigabyte model is $100 more. The more important retail factor, however, is the monthly service charge, and Verizon hasn’t released any details yet. The industry scuttlebutt is that the company will offer an all-you-can-eat data plan, which AT&T stopped doing last year to keep data hogs from straining its network. Verizon currently charges $30 a month for the unlimited plans on other smartphones, with voice and text messages costing extra. That’s $5 more than what AT&T charges its heaviest data users, who can download up to 2 gigabytes of data per month. For those who like to stream The Daily Show with Jon Stewart while in line at Costco (COST), $5 may be a small price to pay.

Quality: It’s hard to know whether AT&T deserves the battering it has received for poor network quality. Each carrier’s coverage differs from area to area. AT&T increased its investment in wireless infrastructure by over $2 billion in 2010, and says it’s improving. As of last August, however, the percentage of dropped calls on AT&T’s network had risen to 5.8 percent, compared with 2 percent for Verizon, according to a survey by Changewave Research. Infonetics Research co-founder Michael Howard says AT&T is more conservative with its network investments and took longer to upgrade from copper wires to fiber-optic cables and other cutting-edge gear. “Verizon planned its network with greater foresight than anyone else,” says Recon Analytics analyst Roger Entner. “They have a very well-built network, and they don’t cut corners.”

Features: The carriers’ iPhones are nearly identical, but where they differ, AT&T has the advantage. Verizon’s network is based on a technology called CDMA, which runs voice and Internet over different tracks. That means Verizon’s iPhone owners won’t be able to surf the Web or use apps while on a call. AT&T users can, and the company says that more of its customers use the simultaneous talk-and-surf capability every day than watch videos or use GPS navigation.

Verizon users can, however, pay extra to transform their iPhone into a Wi-Fi hotspot, and share its cellular signal with up to five other gadgets. AT&T’s iPhones currently link up with only one other gadget, and connect with them via a more limited Blue tooth signal.

Speed: A big part of AT&T’s promotional pushback against Verizon is that its network is faster. Thanks to recent upgrades, AT&T boasts speeds of 6 megabits per second—fast enough to download a song in four or five seconds, and roughly three times what most Verizon subscribers see. Yet that speedy connection is available only in regions where AT&T has finished upgrading the wires that connect cell towers to the Internet, a process that won’t be finished until at least 2013.

Future Proofing: The Verizon iPhone will likely have a short stint in the spotlight. Every year since 2008, Apple has announced a new, upgraded iPhone in early summer. Buying a Verizon iPhone in February likely means missing out on a sleeker version in a few months’ time—although that’s always a worry when buying gadgets.

Both AT&T and Verizon are building next-generation 4G networks with turbo charged speeds. Neither existing iPhone works on them, but analysts expect Apple to introduce a 4G iPhone within a year or so. Verizon is much further along—its 4G service is already available in 38 cities—so its service is a better bet for those hoping to upgrade to 4G speeds as early as possible.

Of course, the iPhone matters not just to Verizon’s customers but also to its investors. No one doubts that winning Apple’s “Jesus phone” will increase Verizon’s subscriber base. UBS Securities (UBS) expects the company to win 3.5 million new customers in 2011, while AT&T, Sprint (S), and T-Mobile will lose around 1 million between them.

Managing that growth won’t be simple. Verizon is expected to pay $5 billion or so to subsidize new iPhone owners this year, which could drag down profit margins. Walter Piecyk, an analyst at brokerage firm BTIG, expects the opposite. He says the iPhone bonanza will allow Verizon to spread fixed costs like stores and TV ads across more units, boosting margins from 46.4 percent last year to 48.1 percent in 2012. If Verizon’s network can handle the new subscribers, he says, it will further damage AT&T’s brand. “They’ve had the iPhone for four years, and they’re still trying to catch up with demand.”

The bottom line: AT&T must now compete with Verizon for iPhone customers. The latter offers a more reliable but slower network.

Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.

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