As usual, iPhone drives AT&T growth, but eats into profits

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As usual, iPhone drives AT&T growth, but eats into profits

By CAROLINE GABRIEL

Published: 24 July, 2009

READ MORE: AT&T | iPhone

It was a familiar pattern at AT&T as it announced second quarter results - customer numbers and data revenues hugely boosted by the iPhone, but profit margins hit by the flagship product. And the picture came with clear dark clouds - potential over-reliance on a single handset, which might go non-exclusive as early as 2010.

However, for the short term, the launch of the iPhone 3GS on June 19 was the biggest boost so far from AT&T's US exclusive, sparking a rush of activations at the end of the quarter that pushed the total for the period to 2.4m. This is almost half of the 5.2m phones sold by Apple during the quarter, reflecting a continuing failure by the US vendor to make the same level of impact in non-US markets as in its home base. Despite the sometimes low level of user satisfaction with AT&T's network as a vehicle to support a quality iPhone experience, the two companies remain tightly bound together.

Luring new customers remains the iPhone's greatest task for AT&T, and one it performs very well - of the 2.4m, about one-third were new customers to AT&T and attracted by the 3GS to purchase an iPhone for the first time. This meant the Apple product was responsible for more than half of AT&T's total of net new subscribers in the quarter, which reached 1.4m, including 1.2m with the higher value monthly postpaid deals. This outdid expectations - analysts had expected 1.08m net new customers.

But the iPhone dealt its now familiar blow to its favorite carrier's profitability, given the increasingly heavy subsidies the operator pays to price the handset more aggressively. These were a key factor in a 15% year-on-year profit drop to $3.2bn, on revenues down slightly from $30.87bn to $30.73bn. This was still ahead of analyst consensus, though, which was $30.64bn.

As usual, AT&T is sacrificing short term profits by subsidizing the iPhone heavily enough to lure 'second wave users' - those who were not prepared to grab an Apple handset at all costs but are attracted by keener pricing; and so to keep poaching other carriers' customers, while continuing to meet Apple's sales targets and stand a better chance of extending the exclusive beyond 2010. Analysts estimate that AT&T pays Apple at least $300 for each iPhone it sells, far higher than in the first generation, so that it can offer the devices to its customers for $99, $199, and $299 with a two-year contract of at least $20 a month. It can make the money back over the period of the deal but the short term impact on margins is painful. AT&T's operating margin in wireless declined to 23.8% from 25.5% a year ago. AT&T has said that the profit rebound will come in 2010 when it pays off the subsidies and but of course, that may be the year it loses its exclusive and has to pitch its pricing/tariff strategies, brand marketing, customer service reputation and (most concerningly) network quality against other potential iPhone carriers such as Verizon Wireless (though the current rumor, of course, is that Verizon will actually launch a completely different Apple device, such as a CDMA tablet).

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