Apple-Verizon in iPhone Face-off

The news that Verizon Wireless, Apple’s first carrier choice, passed on the iPhone two years ago is generating immense chatter in the telecommunications community.

For Apple supporters, Verizon Wireless made a dreadful mistake in turning down a chance to co-brand with the Cupertino, California-based marketing juggernaut. Particularly since the iPhone’s interface could spur wireless data usage among well-heeled subscribers.

For those that support Verizon Wireless, Apple gave up a chance to couple the iPhone with Verizon’s vaunted network and its upscale subscriber base. The fact that Apple gave that up because Verizon refused to surrender full distribution and customer control was shortsighted.

“This is not the MP3 market where Apple is facing off against Creative and other small companies,” said Roger Kay, principal analyst with Wayland, Massachusetts-based Endpoint Technologies Associates.

“With the iPod, they got the content sewn up and they had the market pretty much to themselves,” he added. “That is not how it works in the phone market.”

In the MP3 market, Apple did not need partners outside of the music content owners, Mr. Kay said, but in the telecom business they need a lot of partners including carriers and retail players.

“In the phone business they are coming up against established competitors like Motorola and Nokia that have long established relationships with the carriers,” he said. “Motorola is not like Creative—trying to figure out how to market the Zen.”

Shares of Apple fell $0.29 to $85.65 in recent trading, while Verizon shares rose $0.54 to $38.57.

Verizon’s Arrogance

On the other side of the discussion, Peter Gorham, an independent wireless industry analyst, believes that Verizon Wireless will live to regret its decision.

“The carriers complain loudly that they can’t get consumers to use their data applications and now Apple has provided a better user interface that will spur data usage and Verizon walked away from it,” he said.

“Verizon has a Cadillac network with EVDO Rev A, and they could have put a Cadillac phone on that network and they passed,” Mr. Gorham said. “It’s hard to believe.”

Verizon Wireless confirmed on Monday that Apple did indeed approach the New York-based carrier about an exclusive iPhone deal, but Verizon passed because of Apple’s proposed business model.

Apple insisted on controlling much of the iPhone’s customer service and also the retail channel. Apple apparently wanted retail distribution limited to Apple’s and Verizon Wireless’ retail stores.

That would have left out other established Verizon Wireless retailers such as Circuit City and Wal-Mart.

“It’s a brand new product so it makes sense that Apple would want to control distribution at least in the early stages of the market rollout,” Mr. Gorham said.

“Apple sells the iPod through mass retailers like Circuit City so I don’t think it’s invoking some kind of religious restriction,” he continued. “When the iPhone moves down-market, I am sure they will be open to mass retail. Apple has its own display case at Wal-Mart.”

Apple’s Mystique?

But Apple’s vaunted marketing luster may be dulling a bit, according to Mr. Kay, and the iPhone may be finally exposing the company’s limitations.

“Apple’s divide-and-conquer marketing strategy will not work in the telecom market,” he said. “Many companies have moved into adjacent markets using their old marketing strategies and failed miserably. Dell moving into the printer market was a case in point.”

The dynamics of the telecom market are far different from the PC market, and perhaps Verizon Wireless did not feel like it had to put up with Apple’s demands.

“It’s not like Apple is the only company capable of making a cool phone,” he concluded. “Apple could be the great matador that brings down the telecom bull, but sometimes great matadors get mauled by the bull.”