AT&T, Verizon Earnings in Shadow of iPhone

BOSTON ( TheStreet) -- Apple's ( AAPL) iPhone 4 will soon be available on Verizon's ( VZ) wireless network after a four-year exclusive agreement with AT&T ( T), shaking up the industry close to fourth-quarter results.

Verizon Wireless, the joint venture between Verizon and Vodafone ( VOD), revealed the pact earlier this month on the worst-kept secret in the telecom sector: the iPhone 4 will arrive on Verizon's network next month, the first time the iPhone will be compatible with a network other than AT&T's since its launch in 2007.

The iPhone 4's availability on Verizon provides a spark for a sector in need of a shakeup. While industries such as energy, basic materials, industrials, consumer discretionary and financials have surged in the past three months, telecoms have lagged behind the broader market. The Dow Jones U.S. Telecommunications Index has climbed 3.8% in the past three months, trailing a 9% gain of the S&P 500.

On the heels of the iPhone 4 announcement, one of the sector's big winners is Verizon, the first of the big telco firms to report quarterly results. The stock jumped to a 52-week high of $37.70 on investors' iPhone euphoria. However, as the excitement waned, and worries that subsidies for the handsets will damage earnings, Verizon shares have come back to Earth. AT&T shares, meanwhile, are down slightly since the announcement.

For AT&T and Verizon, as well as Sprint Nextel ( S) and T-Mobile, strength comes down to subscriber numbers. The only issue for wireless providers is that the pool of subscribers isn't growing rapidly, and instead the companies are forced to fight for bigger slices of the pie. With the addition of the iPhone 4 to its lineup of handsets, Verizon looks to have scored a big win. However, investment managers say the growth in the number of users migrating from old mobile phones to new Internet-capable smartphones is the bigger trend to pay attention to.

"As you go through the technology cycle, we're starting to move from early adoption to mass adoption," says Channing Smith, manager of the Tulsa, Okla.-based Capital Advisors Growth Fund ( CIAOX). Capital Advisors Growth Fund has 3% of its $23.5 million in net assets allocated to AT&T and 4.5% dedicated to Vodafone.

"From a mobile-device standpoint, the key will be penetration of smartphone users in the U.S. as that is where more revenue is," Smith adds. "The profitability of these companies will depend on the continued trend toward smartphone adoption. There is still a pretty good runway for smartphone adoption."

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