New iPhone Could End AT&T's U.S. Monopoly

Apple Inc. AAPL -1.80 % plans to begin producing this year a new iPhone that could allow U.S. phone carriers other than AT&T Inc. T -0.55 % to sell the iconic gadget, said people briefed by the company.

 AAPL -1.80 % The new iPhone would work on a type of wireless network called CDMA, these people said. CDMA is used by Verizon Wireless, AT&T's main competitor, as well as Sprint Nextel Corp. and a handful of cellular operators in countries including South Korea and Japan. The vast majority of carriers world-wide, including AT&T, use another technology called GSM.

With Apple developing a phone with CDMA capability, its exclusive U.S. arrangement with AT&T dating to 2007 appears set to end.

Verizon Wireless, owned by Verizon Communications Inc. VZ -0.22 % and Vodafone Group PLC, declined to comment. An AT&T spokesman said: "There has been lots of incorrect speculation on CDMA iPhones for a long time. We haven't seen one yet and only Apple knows when that might occur." Apple declined to comment.

Separately, Apple plans to release a new version of its current iPhone this summer, continuing its practice of annual upgrades at about the same time of year, said people briefed on the matter. The model is likely to be thinner and have a faster processor, two people familiar with the device said.

For AT&T, the Apple relationship has been crucial, helping to make the carrier the U.S. leader in lucrative smart-phone market share. According to comScore Inc., AT&T has over 43% of all U.S. smart-phone customers, compared with 23% for Verizon. These customers are especially attractive because they generally pay higher monthly rates for data plans.

For several quarters, AT&T's growth has come almost single-handedly from the iPhone. In the fourth quarter of 2009, the carrier said it activated 3.1 million new iPhones. In comparison, it counted only a net total of 2.7 million new subscribers as some customers moved from other phones to iPhones.

"You're not going to lose the iPhone [exclusivity] and make up growth somewhere else without bearing the cost," said Sanford C. Bernstein & Co. research analyst Craig Moffett.

The people briefed on the matter said the upgraded GSM iPhone is being made by Taiwanese contract manufacturer Hon Hai Precision Industry Co. 2317 0.52 % , which produced Apple's previous iPhones. The CDMA iPhone model is being made by Pegatron Technology Corp., the contract manufacturing subsidiary of Taiwan's ASUSTeK Computer Inc., ASUUY -2.16 % said these people.

One person familiar with the situation said Pegatron is scheduled to start mass producing CDMA iPhones in September. Other people said, however, that the schedule could change and the phone may not be available to consumers immediately after production begins.

Representatives of Pegatron and Hon Hai declined to comment.

Verizon has publicly stated its interest in the iPhone, but people familiar with the situation said Apple originally decided against developing a phone for Verizon to keep its development process simple, since the technologies are incompatible.

Verizon also is upgrading its network to a higher-speed technology, so Apple has said it believed CDMA was a short-term technology. Apple later changed its mind as it realized Verizon's upgrade would take longer than expected, said people familiar with the situation.

Making the iPhone available through Verizon, which has over 91 million customers, as well as potentially other CDMA carriers could open up a significant new market. In 2009, iPhone sales globally rose 83% to 25.1 million, far outpacing the 20% to 25% growth in smart phones sales overall, according to Bernstein. But since Apple already dominates smart-phone sales through existing partners, "sooner rather than later, Apple is going to have to look to find incremental distribution," said Bernstein analyst Toni Sacconaghi. He estimates Verizon could help Apple nearly double the number of iPhone users in the U.S.

AT&T's relationship with Apple, a lucrative deal arranged by Apple Chief Executive Steve Jobs, shows how such a partnership with other carriers could present challenges.

Analysts estimate AT&T pays Apple more than $600 per phone, but sells most of them for $199 or less. Heavy iPhone users have also put an enormous load on AT&T's wireless network, pushing the carrier to a breaking point in some markets such as New York and San Francisco.

Qualcomm Inc., QCOM -0.45 % which holds patent rights to CDMA, is the dominant designer of CDMA chips.

Write to Yukari Iwatani Kane at yukari.iwatani@wsj.com and Niraj Sheth at niraj.sheth@wsj.com