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Oct 22, 2008

Apple's iPhone Boosts AT&T's Wireless Business, But Whacks Profits

Ed: Apple sold 6.9 million phones in Q3. From ISP subsidies and customer purchase, the revenue impact is $2.8 billion. Further, Apple earns royalties from monthly fees, margins from iTune and App purchases, and halo switch to the Macintosh platform. It's a grand slam.

AT&T complained that iPhone lowered profits by $900 million. Between subsidies and cost to activate new customers, they are spending $400 per customer - without the normal cost of advertising to bring customers into the store. Apple supplies the latter as value-add. One analyst suggested increased capital expenditures as the cause. iPhone uses both 3G and Wi-fi. Thus, there's less impact on capex. The real  issue is productivity. Anyone who has called AT&T support knows the problem. They fail on labor productivity - and the results show. AT&T is unable to scale with rapid change.

Apple's iPhone Boosts AT&T's Wireless Business, But Whacks Profits


iphone ad.jpgWhy did AT&T (T) make sacrifices to become Apple's (AAPL) official U.S. iPhone carrier? Because it's leading the company in growth: AT&T says it activated 2.4 million (about a third of Apple's 6.9 million total) iPhones last quarter, including about 40% to customers who were new to AT&T. That helped the carrier add 2.0 million net new wireless subscribers last quarter, ahead of expectations.

But subsidizing all of those new 3G iPhones took a bigger than expected whack to the company's earnings and margins. And that's going to keep happening. From AT&T's release:

AT&Ts third-quarter 2008 reported and adjusted margins and earnings reflect revenue growth and continued progress with previously outlined cost initiatives, offset by hurricane-related expenses and effects on wireless results from the iPhone 3G. Impacts from the companys iPhone 3G initiative reduced pretax third-quarter earnings by approximately $900 million or $0.10 per share...

Based on third-quarter customer response, AT&T is optimistic regarding continued strong iPhone 3G activations and is confident in the long-term value created by this investment in acquiring high-value, data-centric wireless subscribers. As a result, AT&T expects its dilution associated with the iPhone 3G will run above its previous expectation, and AT&T now expects, depending on volumes, its full-year 2008 wireless service OIBDA margin to be better than 37 percent versus its previous outlook of 39 percent to 40 percent. AT&T expects its full-year adjusted consolidated operating income margin to be approximately 23 percent versus its previous outlook of approximately 24 percent.

Why is this a good thing anyway? Because iPhone subscribers spend about 1.6 times more money on wireless service per month, and use the mobile Internet more than other subscribers -- important to AT&T's strategic goals.

Also of note, AT&T says more than two thirds of its 1.7 million "postpaid" net subscriber additions -- who sign long-term contracts and pay monthly bills -- bought smartphones last quarter, surely led by Apple's iPhone. The telco says 22% of its subcribers now use smartphones, up from 10.5% a year ago.

Overall, AT&T reported in-line Q3 sales of $31.3 billion, but adjusted EPS missed consensus: AT&T posted 67 cents per share, below analysts' 71 cents per share estimate.

AT&T is reporting a boom in customer acquisition and, it seems, a bust in profits. According to a recent earnings report, the company activated 2.4 million iPhones but lost $900 million in third-quarter earnings as a result of all the data and voice blowing through Apple’s darling.

The iPhone, we see, is a double-edged sword. Because it goes out to early adopters and folks who understand mobile data, AT&T faces the same problems MVNOs like Helio faced in the U.S.: aim at heavy data users and get hit for data usage. While this is a testament to the majesty of Steve Jobs, it’s also a problem for AT&T. How can they keep making profits if they’re spending on their cash on network upgrades?

As we all know, all that data comes at a price. The high bills AT&T is sending out to 3G users attests to this and it will definitely be harder in the coming months to convince price-conscious consumers to pony up $175 or more just to get Facebook on the go.

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