Cary Fabrikant's devotion to Apple Inc. spells trouble for his cellular carrier, Sprint Nextel Corp.
Fabrikant, a Miami sports agent, plans to forfeit $200 and switch to AT&T Inc. to get an iPhone, Apple's blend of an iPod music player with a mobile phone, when it goes on sale today.
"If it's everything that's promised, I won't think twice about breaking my contract," said Fabrikant, visiting an Apple Store at a Los Angeles shopping mall this month. "It'll be way more consumer-friendly than anything else out there."
There may be thousands more like him. Armed with an exclusive deal to sell the $499 to $599 iPhone, AT&T, the largest U.S. wireless carrier, will lure more than 1.1 million customers from No. 3 Sprint by next year, Bear Stearns analyst Michael McCormack predicts. That could crush Sprint's promise to reverse three quarters of subscriber declines and endanger a 16 percent jump in Sprint's shares this year (through Tuesday).
"Sprint is the one that gets hurt the most, stock price-wise and operationally," said Christopher Larsen, a Credit Suisse analyst in New York who rates Sprint "neutral" and AT&T "outperform."
Sprint's shares have climbed faster this year than AT&T and New York-based Verizon Communications Inc., propelled by buyout speculation and Sprint's forecast for a return to subscriber growth.
Shares of Reston, Virginia-based Sprint fell 65 cents to $21.31 at 12:28 p.m. in New York Stock Exchange composite trading. San Antonio-based AT&T advanced 30 cents to $39.59 and had climbed 9.9 percent this year before Wednesday. Verizon Communications, which co-owns No. 2 Verizon Wireless with Newbury, England-based Vodafone Group Plc, declined 34 cents to $40.73 and had risen 10 percent this year.
At those prices, Sprint is trading at 25 times estimated 2007 earnings, more expensive than AT&T's 15 times estimates and 17 times for Verizon. If Sprint can't stem account losses this year, the stock may fall below $20, said Larsen.
The iPhone "could be the difference between, 'Wow, that's a really good quarter,' and 'Oh boy, you guys have problems,"' Larsen said.
Reviewers from the Wall Street Journal, the New York Times and USA Today lauded the iPhone's software and design today, while noting that reception isn't clear in some areas. The Journal's Walt Mossberg called the device a "beautiful and breakthrough handheld computer."
AT&T, with 61 million users, holds about 26 percent of the 223 million U.S. mobile-phone accounts, based on data from the company and from the Cellular Telecommunications & Internet Association. Verizon has 59 million customers and a 25 percent share, while Sprint has 53.1 million, or 23 percent.
By the end of 2008, the iPhone may cost Verizon 949,000 subscribers, McCormack said.
Sprint is more vulnerable because unlike Verizon, the company doesn't own home-phone lines. Wireless revenue represented 86 percent of Sprint's sales in 2006, compared with 43 percent at Verizon, holder of a 55 percent stake in Basking Ridge, New Jersey-based Verizon Wireless.
Customers of Sprint also tend to be younger and technology- savvy, making them the perfect iPhone converts, said John Hodulik, a UBS AG analyst in New York who rates Sprint and Verizon a "neutral."
In the first quarter, Sprint users spent an average of $9.25 a month for text messaging, Internet access and other data services, more than the $8.95 for Verizon and $7.88 for AT&T.
Larsen estimates Sprint will add 2 million monthly subscribers between July and the end of 2008. If the iPhone cuts into that prediction substantially, 2008 earnings estimates "become very, very much in doubt."
Analysts estimate Sprint will make a profit of $1.66 billion, or 89 cents a share, in 2008, according to the average in a Bloomberg survey.
Sprint lost 714,000 monthly subscribers in the past nine months, most of them customers acquired in the 2005 purchase of Nextel Communications Inc. Chief Executive Officer Gary Forsee in May forecast an increase in monthly subscribers this period, and growth from there in each of the year's final two quarters.
AT&T's competitors are making preparations for the iPhone rarely seen in response to a single mobile handset. Verizon has instructed store employees to emphasize its network quality and is offering alternate music players such as LG Electronics Inc.'s Chocolate. Sprint is aiming to turn the attention showered on the iPhone toward its own music phones.
"Never before has there been so much buzz around one device," said Alana Muller, Sprint's director of wireless data applications. "People are becoming more curious about what it means to have music on your phone."
In April, Sprint began selling Samsung Electronics Co.'s UpStage, whose name describes the device's intended impact on iPhone. McCormack said the UpStage, with a music player on one side and a phone on the other, probably won't measure up to the iPhone, which he hadn't yet tested.
"In relation to the iPod, the experience is not the same with the UpStage," McCormack said. "It's inferior."
To stave off AT&T, Sprint is using classroom instruction, computer training and newsletters to train retail representatives how to handle iPhone inquiries, Muller said. They'll emphasize the ability of the UpStage and other Sprint phones to download music wirelessly, a feature iPhone lacks.
"Do we have what it takes to compete?" Sprint's Muller said in an interview. "The answer is an unequivocal 'Yes."'
Prospective customers say they are attracted by the iPhone's design and features, including wireless Internet access for e- mail, touch-screen keypad and the ability to play movies.
"It combines two or three of the things I carry with me all the time," said Mike Brescio, who works in lending at General Electric Co.'s GE Energy Financial Services in New York.
Fabrikant, who said he was in his mid-40s, said he switched to a Macintosh computer this year and wants to buy more Apple products.
Apple and AT&T haven't disclosed financial details of their partnership. Customers are required to commit to a two-year agreement for AT&T service. The plans run $60 to $220 a month, including wireless data and messaging.
Flouting the mobile-phone industry's custom, AT&T doesn't plan to offer discounts on the phones to encourage people to sign up. That policy means AT&T may break even or make a small profit on the sale of each iPhone, a rarity in an industry where wireless carriers normally sell handsets at a loss to recruit subscribers, analysts including McCormack and Hodulik said.
Verizon may be in the best position to absorb the iPhone's impact, said analysts including McCormack. AT&T's reception throughout the country isn't as good as Verizon's, said Ronald Hurwitz, a retired physician from Bloomfield Hills, Michigan, who said he travels between Michigan, New York and Florida. Speaking outside the Apple Store on New York's Fifth Avenue, he said he's a fan of Apple products and will consider buying an iPhone.
"I wish they would deal with someone other than AT&T," Hurwitz said. "I would be a lot more comfortable spending $600 if I didn't have to switch from Verizon."
With reporting by Andy Fixmer in Los Angeles, and Amy Thomson and Katie Hoffmann in New York.