Smartphones key to Verizon Wireless recovery

The recession has “unambiguously arrived” for Verizon (NYSE:VZ), according to Bernstein Research analyst Craig Moffett, but it is not all bad news. Verizon today reported shrinking revenues across its wireline business and slowing revenues in wireless, but its recovery will be driven by its release of 12 new devices in the fourth quarter and potentially even the iPhone in 2010.

On an earnings conference call today, Verizon Wireless (NYSE:VZ, NYSE:VOD) executives stressed the strength of its existing smartphone lineup. Although not its traditional strong suit, VZW has expanded its BlackBerry lineup and has 12 new smartphones, including the Motorola Droid, Storm 2, Curve 2, planned for the fourth quarter. Julien Blin, principal analyst and CEO of JBB Research, said this device defensive, coupled with VZW’s upcoming LTE deployment and open-network initiative, will be key drivers for the wireless operator’s recovery.

Verizon’s long-term evolution (LTE) network will also be a vital component, in part because it could mean an iPhone for the carrier. Apple is changing its business model from exclusive carrier deals to multicarrier deals in every country where its device is available. Blin said that the DOJ’s investigation into exclusive contracts could put an end to AT&T’s (NYSE:T) exclusive iPhone contract and make it available to Verizon in 2010. VZW has said it will leave the decision up to Apple, but is rumored to be testing a Qualcomm-based LTE iPhone for next year.

“While Verizon is now focusing on the Motorola Droid, there is no doubt in our mind that Verizon is looking at the iPhone opportunity as it could help the carrier sustain its lead in terms of wireless data revenue and total subscriber adds,” Blin wrote in a research note. “In fact, management indicated that it is still interested in iPhone 3G S, but it is up to Apple.”

The Palm Pre, which VZW said it will carry early next year, should also help the carrier compete. It is also rumored to be in discussions to carry an Apple tablet PC sometime next year. Blin believes that VZW will be delving more into connected devices in general, much like AT&T is doing with its emerging devices initiative.

“When you deploy 4G, it forces you to think about a broad array of devices as opposed to just the specific smart devices that we see out there now,” said Chief Executive Officer Ivan Seidenberg. “The ones out there now are terrific; they are getting better. But when you look at 4G, and then you look at machine-to-machine, data revenue opportunity will come in so many different places that we want to make sure our strategy has the breadth to capture a lot of things and not just focus on one or two or three devices. Our view is to lay the groundwork for a very broad array of data growth, which leads obviously to the combination of integrated applications, video and all sorts of sophisticated data applications.”

At the same time that VZW is rumored to be vying for the iPhone, it has clearly gone on the defensive against it. In addition to its own line of powerful new smartphones, it is entering the mobile application store space with a storefront expected to launch in the fourth quarter. VZW has claimed its store will reach one billion customers – a misleading number, Blin said, given that it includes Vodafone’s customers. VZW did, however, join the Joint Innovation Lab, a global organization formed to create standards for web-based mobile apps, as well as plans to harmonize its app stores with its handset makers and operating systems.

Overall, VZW still came out ahead of AT&T in total subscriber additions in the third quarter, with a total of 89 million wireless subscribers, compared to AT&T’s 81.59 million in Q3. It added 943,000 post-paid subscribers and 270,000 wholesale net additions, its highest since 2005, stemming primarily from its Walmart-sold Tracfone offer, Straight Talk. Average revenue per user on its wireless business took a hit, however, for voice and overall.  On the wireline front, Verizon continued to lose in its fixed-line business, but reported gains for its FiOS broadband service.