AT&T and Verizon Wireless want Windows Phone smartphones to succeed in the U.S., partly to provide leverage against Apple's demands for subsidies and other concessions required for selling the popular iPhone.
AT&T recently began selling the Nokia Lumia 900 with the Windows Phone 7 operating system for a competitive $99.99 price. Meanwhile, Verizon Chief Financial Officer Fran Shammo recently told Reuters that Verizon is "really looking at the Windows Phone 8.0 platform because that's a differentiator."
Both carriers need a strong competitor -- like Windows Phone -- to go up against the iPhone and Android phones, analysts said. The wireless carriers could then tell Apple that they can sell quality smartphones that don't cost the carriers as much as the iPhone to subsidize. The iPhone sells well but also eats into carrier profits because of the subsidy and related costs.
"Mobile operators are sick of taking orders from Apple, [which is one] reason why carriers like AT&T and Verizon are backing Windows Phone," said Yankee Group analyst Katie Lewis in a blog posted Wednesday. "IPhones are occupying an increasingly dangerous share of operators' smartphone sales," she wrote.
In 2011, iPhones were half of AT&T's smartphone sales -- totaling about 16 million iPhones -- while Verizon has seen a strong surge recently in the same direction, Lewis noted. "The companies' fears of an Apple takeover are growing stronger," she added, partly because customer surveys show an increase in future buyers interested in owning an iPhone.
Apple's demands for subsidies in order for a carrier to sell an iPhone are legendary. U.S. carriers heavily subsidize all smartphone hardware, primarily to entice new customers to buy a two-year service contract that costs more than $1,700 over that period. The iPhone 4S with 16GB sells unlocked from Apple for $649 (useful on many GSM carriers with a separate contract), but Verizon, AT&T and Sprint sell it for $199.99 with a two-year contract.
Apple also gets a cut, or royalty, of the carrier's revenue realized from each new iPhone user. This royalty "is part of the negotiations to put iPhone on a carrier's network," said analyst Jack Gold of J. Gold Associates. "Apple argues it's worth it to the carrier, since their users are loyal and generate more revenues due to the popularity of the iPhone." Other phone makers, such as Samsung and HTC, don't get a similar cut.
Apple collects as much as $600 per iPhone user in royalties from the carriers on top of the hardware profits from the phones, according to several analysts, although Apple and the carriers have never confirmed that amount.
Clearly, the carriers would rather not share the iPhone revenues with Apple. "If carriers can get a lot of users on competitors to the iPhone, they can potentially generate more revenues and profits because they don't have to give Apple a cut," Gold said.
Yankee's Lewis added via email: "To stay relevant, retain customers and gain new ones, carriers have no choice but to carry the iPhone, so they essentially can't turn down a deal with Apple. Because of this fact, carriers are losing control over their customers, the customer billing experience and the U.S. smartphone market overall. To maintain control, mobile operators need a third mobile ecosystem to be successful and to provide some competition to Apple's iOS/iPhone and Google's Android platform."
Apple's influence over the carriers shows up in other ways, including how the iPhone must be displayed in the carriers' stores or how it is advertised on TV. IDC analyst Ramon Llamas noted that even at the level of the device logos and carrier-branded apps, Apple has stricter standards than other manufacturers.
For example, the iPhone doesn't include a carrier's logo on the exterior, while most Android phones and others will prominently show the carrier's name above the manufacturer's name, Llamas said. Once turned on, an iPhone relegates the carrier's name to a narrow banner at the top of a home screen along with the number of bars of network reception, while many other phones have a carrier's logo splashed on a separate screen during the booting process. Carrier-branded apps prevalent on many smartphones, including the Lumia 900, are buried in iPhones.
"There's a lot of coordination on Apple's part," Llamas said. "They want to maintain tight control."
Even so, Llamas said iPhones have sold "incredibly well," which gives Apple plenty of influence over the carriers.
"I don't think the carriers would turn off the Apple faucet, but can they put pressure on Apple?" Llamas asked. "Apple's already felt pressure with Android, and Windows Phone's more pressure, perhaps. BlackBerry 10 may be more pressure."
Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen or subscribe to Matt's RSS feed. His email address is firstname.lastname@example.org.