New gear from Apple and Verizon Wireless‾

Spencer E. Ante and Arik Hesseldahl
29 Apr 2009

Verizon Wireless is warming to the idea of an Apple (AAPL) partnership. Verizon Wireless is in talks with Apple to distribute two new iPhone-like devices, BusinessWeek has learned. Apple has created prototypes of the devices, and discussions reaching back a half-year have involved Apple CEO Steve Jobs, according to two people familiar with the matter.

One device is a smaller, less expensive calling device described by a person who has seen it as an 'iPhone lite.' The other is a media pad that would let users listen to music, view photos, and watch high-definition videos, the person says. It would place calls over a Wi-Fi connection. One of these devices may be introduced as early as this summer, one person says.

Until now, AT&T (T) has been the only carrier of Apple's iPhone in the U.S., adding more than 7 million subscribers as a result of the arrangement; the company is reportedly in talks with Apple to extend the partnership, due to end as soon as next year. An agreement to distribute Apple communication devices via Verizon Wireless may cost AT&T some of the business it has gained as the sole Apple carrier. Even if Verizon Wireless and Apple fail to strike a deal, talks between them increase pressure on AT&T to accept partnership terms favorable to Apple.

A turnabout for Verizon Wireless

In a recent interview with BusinessWeek, Verizon Wireless CEO Lowell McAdam confirmed that the company has spoken with Apple executives. 'In the last six months, I have talked to Steve Jobs,' McAdam says. Although McAdam would not say what the two companies discussed, two people familiar with the subject said talks covered the new smaller iPhone-like device under development. Representatives of Verizon Wireless and Apple declined to comment. AT&T spokesman Mark Siegel says: 'We are delighted with the iPhone and our partnership with Apple.' The company declined to make an executive available.

The recent round of talks marks a turnabout for Verizon Wireless, which initially balked at becoming the exclusive U.S. distributor of the iPhone. Verizon Wireless, a joint venture of Verizon Communications (VZ) and Vodafone (VOD), chafed at Apple's request early on to take a cut of the phone's monthly service fees and its desire to choose which retailers could sell the phone. Despite the failure of that deal, McAdam says 'there is no animosity' between the two companies.

While talks between Verizon Wireless and Apple have heated up recently, no deal is imminent. It's possible both sides may disagree over financial terms, such as how big a subsidy Verizon Wireless might pay for each device or whether to share monthly service revenue with Apple. Another deal breaker could be disagreements over distribution of wireless software applications. Apple is the exclusive provider and distributor of apps for the AT&T iPhone. If Apple requests a similar deal on newer devices, Verizon Wireless may balk.

Whatever the outcome of Apple's discussions with Verizon Wireless, they at least could be used as a bargaining chip to help win concessions from AT&T. Apple may want AT&T to absorb an even larger portion of the costs of manufacturing the phone. Plus, it may seek to obtain promises from AT&T to beef up investments in its network and customer service operations. Many iPhone customers have complained about the quality of AT&T's wireless network. AT&T's success is so tied to the iPhone that it may have little choice but to accede to Apple's demands.

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