A CDMA iPhone would be great for Verizon, but does it make sense for Apple?

If Apple decided to make a CDMA iPhone, the whoops of jubilation would be heard all the way from Verizon Wireless’headquarters in Basking Ridge, NJ, to AT&T’s HQ in Dallas, TX, where the news would no doubt be greeted with stunned silence. Latest reports cite unnamed sources as confirming that Verizon Wireless will offer the iPhone in January, when they say AT&T’s exclusive deal with Apple ends.

Put simply, a CDMA iPhone would be the best thing that could happen to Verizon Wireless. The operator has suffered by not being able to offer the iPhone, especially with its most valuable subscribers, who have either left to join AT&T or grumbled about not being able to own the most sought-after consumer-electronics device around.

At the same time, AT&T has benefitted in so many ways from being the sole supplier of the iPhone, as evidenced not least by its strong churn figures. Despite not having the best network, AT&T has the lowest customer churn among US operators, at 1.3% at end-March 2010, according to Informa Telecoms & Media.

So, by being able to offer the iPhone, Verizon Wireless could stem the flow of high-end subscribers to AT&T and gradually get back the ones it’s lost.

And what would Apple gain from offering a CDMA iPhone?

Manufacturing a 3G CDMA iPhone would enable Verizon’s 92.8 million subscribers to buy the device without changing network operator. Globally, there are about 120 CDMA operators, with 466 million CDMA subscriptions between them. This means that subscribers to these CDMA operators would be able to buy the iPhone without changing operator.

But the picture isn’t as simple as that. The global market for CDMA iPhones is not as healthy as the top-line figures suggest. The majority of CDMA operators are in emerging markets, where demand for the iPhone is already being met by the WCDMA version.

How many CDMA subscribers in, say, Venezuela, aren’t buying an iPhone just because it’s not CDMA? I’d say very few. The vast majority of global CDMA subscribers just don’t want, or can’t afford, an iPhone. Verizon Wireless is in a unique position in the US, because the perception that its network is much better than its rivals’ doesn’t arise in other markets, where network quality is less differentiated from operator to operator.

What’s more, many of the top 10 CDMA operators, which between them account for 77.5% of total CDMA subscriptions, are looking at next-generation-network futures that don’t include CDMA.

However, some forecasters have estimated that a CDMA iPhone would bring in an extra US$7 billion in revenues for Apple, based in part on Verizon signing up 8-9 million iPhone subscribers a year. This forecast rests on the assumption that there are 8-9 million potential Verizon iPhone customers not churning to AT&T because of allegiance to Verizon. That seems like a very high number to me, but it’s possible that many existing US iPhone subscribers would swap networks to take advantage of Verizon’s much-touted superior network.

CDMA iPhone complexities

On the one hand, the approach required to launch a CDMA iPhone would go against Apple’s phenomenally successful strategy of producing high-margin, high-volume products that differentiate on design, software, usability and the unique application of existing technology. Because of this approach, Apple would be unlikely to produce a lower margin version of a device to serve a relatively small market. Apple didn’t launch a CDMA version of the iPad when it could have done so if it saw sufficient demand.

However, rather than offering two completely different versions of the iPhone – CDMA and WCDMA – Apple could re-design the iPhone to incorporate both a WCDMA and CDMA chipset, retaining the same design for both and slotting in a different chipset for different carriers. While this would essentially mean a new product launch for Apple, and with it new risks, the potential market share gains make the new risks worthwhile.

But Apple is used to breaking new ground, and it is perfectly capable of producing a new CDMA-compatible iPhone if it thinks it makes enough business sense to do so. Even if Apple sold half the number of the 8-9 million forecast CDMA iPhone sales, this would significantly boost Apple’s revenues and smartphone market share.

Perhaps a CDMA iPhone isn’t in the cards, and it’s an LTE version that Verizon is rumored to begin selling. This makes sense, but not in the near term. It’s highly unlikely that Apple would make an LTE iPhone until LTE networks are mass-market and other handset manufacturers have ironed out the problems the technology will inevitably have. Remember, Apple didn’t launch a 3G version of the iPhone until mid-2008, long after the first 3G networks were rolled out. Apple will surely wait for others to make the first expensive mistakes with LTE. This would mean that Verizon could have to wait until 2012-2013 to offer an LTE version of the iPhone.

Apple’s move into CDMA depends on its assessment of the market potential for a CDMA- iPhone in the context of the costs and potential technical problems with producing a new device to cater to that market. At the latest we’ll know whther there will be a CDMA iPhone around January, when AT&T’s exclusivity deal with Apple is understood to come to an end.