Apple & Verizon Team Up On iPhone: How Will ETFs Respond?

by on January 12, 2011 | ETFs Mentioned:

Finally, no more rumors, no more speculation, Verizon Wireless has officially announced they will be servicing the iPhone come February 10th of this year. Apple’s iPhone broke ground for the smartphone industry four years ago, and it quickly became the poster child for the new generation of mobile devices. For years, the iPhone has been offered exclusively through AT&T, a partnership that has been rumored to end for quite some time, but now a confirmation that the partnership has been dissolved has the Street up in arms. From a consumer standpoint, the news is fantastic; users will now have the choice between two networks with the iPhone, allowing many to stay with Verizon if they so choose. But from an investment standpoint, the news may not be as good as some might have you believe [see also Ten Commandments Of ETF Investing].

Let’s start with the upside: Verizon Wireless will now see a surge in customers who have long been frustrated with the AT&T network, as there are claims that it does not always perform properly. It is estimated that Verizon will sell between 5 and 13 million iPhones this year alone, and some of that figure will come from devices that AT&T would have sold had it been able to keep its exclusive partnership with Apple. Now servicing both Android phones and the iPhone, Verizon Wireless, the nations largest provider, will have an impressive hold on the most sought after devices on today’s market. However, many analysts are growing increasingly concerned that the downside may cancel out any surge  in new customers [see also Best ETF Performers Of 2010: Winners For Every ETFdb Category].

For starters, many fear that the sudden influx of new smartphones will overwhelm the Verizon network, and slow down service for everyone. Currently, many believe that some of the issues that AT&T faces, as far as service is concerned, stems from the large number of iPhone users constantly accessing the web, downloading data, and clogging the network. Next, the first version of the Verizon device will only work on the 3G network, which may put the phone immediately behind the curve, as Verizon has been steadily building a 4G network that it plans to unveil later this year. Also, Apple has released a new iPhone model every summer, meaning that if the iPhone 5 comes out this summer– as many analysts expect– Verizon may have to wait until next January to get it, assuming the company is on the same one-year upgrade cycle that Apple instated with AT&T [see also Internet ETFs: Five Ways To Play].

Verizon will also take a hit because it will be forced to pay a subsidy to Apple for every phone it sells, putting a damper on earnings. John Hodulik at UBS estimates that these subsidies alone will “reduce Verizon earnings this year by a net 15 cents per share, or about $425 million”. This impact can best be seen with AT&T who has suffered from its deal with Apple. Thanks to the drag on earnings caused by the hefty subsidies, as well as numerous customers leaving the AT&T network due to frustration with service quality, has led to AT&T underperforming Verizon by almost 20% since the iPhone was unveiled in 2007, and many are now worried that a similar situation may happen with Verizon and their deal with the tech giant.

Network Impact

With AT&T losing exclusivity on their most prized device, investors can expect the company to come out firing in 2011, as the telecom giant will need to innovate in order to stay in the smartphone race. But this move may not be as catastrophic as some think. For starters, AT&T will likely see an improvement in service assuming it loses a large number of customers to Verizon. With less people on the network, AT&T may be able to improve the quality of its service, keeping current customers more satisfied. And for those worried about the iPhone jamming the Verizon network, knowing how the new Android devices operate on the network may help alleviate these fears. New Android devices, such as the Droid 2 and Droid X, are always connected to the internet no matter what the user is doing (subsequently leading to low battery lives), meaning that they are constantly accessing data, and utilizing the current network without issue so far. Considering this, it may be possible for Verizon to handle the iPhone influx as is, but investors will just have to wait until next month to find out for sure [see also Three ETFs For Smart Phone Exposure].

While there is speculation over how these two telecom giants will perform, there is little doubt that Apple will quietly sit back and reap the benefits of its ever-expanding iPhone. The news is also good for ETF Database, as we recently unveiled our new FREE iPhone App which is now available for download on your smartphone! [see Announcing The FREE ETFdb iPhone App].

Below, we outline two ETFs that will be heavily impacted by the coming Verizon iPhone. Investors with a heavy stake in either of the funds listed below would be wise to keep up-to-date on any new news in the smart phone industry going forward, as it could potentially tip the scales in this ongoing battle between the bitter rivals of AT&T and Verizon.

HOLDRS Merrill Lynch Telecom (TTH)

This telecom HOLDR fund contains the who’s who of American service providers. The top two holdings include AT&T(51.7%) and Verizon (25.6%), giving this fund huge exposure to the iPhone’s move. The fund lost 1.3% in trading Tuesday following Verizon’s official announcement, though it does offer a substantial dividend of 5.4%. For the time being, it seems that the general consensus is that AT&T and Verizon will both suffer from this move in the short-term, creating major headwinds for this ETF as the year goes on. But, if Verizon is able to handle the iPhone well, look for this fund to remain relatively stable, as any gains in Verizon will likely be offset by losses that AT&T is expected to endure [see also Five Facts About HOLDRS Every ETF Investor Must Know].

PowerShares QQQ Trust (QQQQ)

This ETF tracks the NASDAQ-100 Index, which includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. Apple comes in as the top holding of the fund, accounting for over 20% of the ETF. QQQQ has had a solid past year, returning over 21% in its last 52 trading weeks. With Apple dominating this fund, QQQQ may see strong gains in the coming weeks as the tech giant boosts its revenues by garnering more subsidies from Verizon and potentially releases a newer version of the phone later this year. Should the iPhone be welcomed on Verizon it could ensure that much like 2010, this year is a solid one for the technology sector and specifically, Apple.

[For more ETF ideas sign up for our free ETF newsletter.]

Disclosure: Photo courtesy of Jon Mountjoy. Long VZ.