Verizon to get iPhone for Xmas 2010

A report from research outfit OTR today says that Apple's quietly, finally, contracted out assembly for a Verizon-compatible iPhone that they say is likely to hit in the second half of next year. They're likely dead on.

When I used to run a tech-centric hedge fund, I read every OTR report that came across my desk, as they deliver objective data and information and quotes from their sources, which run deep into the technology world, but doesn't include that illegal insider information stuff that the SEC is rightly cracking down with their Galleon charges and what not. Yeah, despite the SEC finally getting in gear and going after clear examples of insider trading in which the players themselves were actively sneaking around trying to avoid putting off any scents of their misdeeds, not all information is illegal. Indeed, calling around to talk to company's sales people about how their individual sales goals are trending and visiting suppliers to your company and reading every report you can get your hands on about your company and its industry is both legal and important if you're going to be a money manager full time.

And when you take a step back and look at what the information and marketplace are telling you, it's pretty clear that AT&T's going to lose its exclusivity contract with Apple for the iPhone sooner rather than later.

Here's five reasons why you'll be able to buy an Apple iPhone from Verizon for Christmas 2010:

1. AT&T's horrible network coverage is hurting Apple's brand. I have an AT&T Blackberry Curve that Fox Business gave me and I can tell you that I don't even bother to use it as a phone EVER since I also have a Verizon Blackberry Curve that actually works when I try to call people on it. The AT&T network does provide crystal clear coverage on top of our mountain ranch land in NM where the cows outpopulate the people. Not sure why that's good for Apple's brand though, considering I can't even take a call from inside my downtown NYC apartment on AT&T's network.

2. Apple wants the iPhone to become as de facto a standard as iTunes has, and in order to do that, the iPhone needs to be carrier-neutral. When a company's products become de facto standards, you get the wild economies of scale that drive huge margins like you see in, say, Microsoft's Windows business, which is clearly a de facto standard even to this day, and which results in 99% gross margins. Apple's iPhone won't ever have gross margins of 99% since its hardware and not the zero-cost reproduction costs of software, but guess what does have 99% gross margins for Apple. Yup, all the software and apps that run on the iPhone. Give away the razors, charge for the blades.

3. Apple needs network distribution diversification. That is, they need to bet on other technologies than AT&T's GSM-based technology. It was brilliant to start with GSM and AT&T as most of the rest of the developed world's wireless networks are built on GSM-based standards and therefore the iPhone that Apple started with was able to be instantly rolled out to other countries without much if any hardware or sourcing differences. That economy of scale thing again worked here. But now Apple can and will gain bigger economies of scale by bringing out an iPhone that will work on any network, including CDMA-based networks like Verizon's. Oh, and LTE, the next generation of wireless broadband that Verizon will be buildilng on top of its CDMA-based network is going to further the distance between AT&T's shoddy network and Verizon's best of show network.

4. Qualcomm's got new chips rolling out that make it easy for Apple to tweak the components of the iPhone so that a CDMA-based and GSM-based iPhones would be almost interchangeable. Economies of scale gained by improved technology. Again.

And here's a surprising "Flip It" idea for you:

5. AT&T has been subsidizing, straight out of their cash flow, and at current prices that's probably costing them somewhere between $200 to $500 per iPhone in order to be able to offer the phone at the price points it does here in the U.S. AT&T pays Apple billions to keep that iPhone exclusive. That iPhone subsidy's probably double what Verizon and AT&T and the other carriers subsidize to the other hand set vendors like Blackberry. In that sense, now that AT&T's got a huge iPhone army in place, if they can keep their churn to low levels, it's likely the company can actually see its cash flow, EBITDA and earnings numbers expand in part because they'd be cutting back on the subsidies and payouts to Apple.

And so how do you trade off all this analysis. Apple's continuing to position itself to see its margins and earnings expand for years as they become ever more reliant on higher margin apps and software because of the success they're having in making their lower-margin hardware the de facto standards today. Stick with Apple, though I still think there'll be another opportunity to buy it at lower levels than its $200 print here as the stock markets get extended here again. Technicians might tell you there's some resistance above $200 for Apple too.

And as for Verizon and AT&T, I remain very concerned about the outsized debt loads they each carry. They've each borrowed tens of billions of dollars to roll out their networks and now they each have billions of dollars of debt coming due in the next few years. Cash flow at each company is great and more than covers their dividends and expenditures lately, but that debt sure's got me worried.

Owning stocks like Apple with tens of billions of dollars of cash and no debt sure helps me rest easier than hoping stocks like AT&T and Verizon don't run into any financial problems. Remember when the auto companies like GM and Ford used to tell you that borrowing tens of billions of dollars wouldn't be any big deal. It was. That debt's gonna matter at AT&T and Verizon someday too. Those yields on their stocks, which are paying 3 times treasuries will pay you to wait. But the upside's not hopeful enough at either to make me think I'd be waiting for much of anything but more worry about their debt and if that dividend is sustainable for the next five years.

Upshot - Verizon to get iPhone for Xmas 2010. Apple has a good outlook and good balance sheet. Verizon and AT&T have decent outlooks but horrid balance sheets. Stick with Apple. Avoid Verizon and AT&T.