UPDATE: AT&T's iPhone Shift to Cost Up to $1 Billion a Year
Published on: 9th Jun 2008
Note -- this news article is more than a year old.
WASHINGTON (Dow Jones) AT&T's shift to subsidizing sales of Apple's iPhones to attract more customers will cost the company up to $1 billion in 2008 alone, analysts said.
Under a revised deal announced Monday, AT&T (T) will no long share monthly revenue from iPhone customers with Apple. Instead, AT&T will revert to a common industry practice of "buying" iPhones from the handset maker and then reselling them to consumers at a lower price.
"The device is built, and priced, to sell," said Ralph de la Vega, chief executive of AT&T Mobility.
The cost won't be cheap. AT&T said the new approach will reduce earnings by 10 to 12 cents a share in each of the next two years.
Cowen & Co analyst Tom Watts referred to the strategy as a "billion dollar baby," saying that's how much it will cost AT&T to subsidize the phone this year.
Investors reacted to the news by driving down shares of AT&T 1.7% to $37.56 in Monday trading.
By eliminating the unusual revenue-sharing agreement, however, AT&T said it expects its new iPhone strategy to start to add to profits in 2010. AT&T is the exclusive U.S. supplier of the iPhone under a multi-year agreement with Apple.
The revenue-sharing deal with Apple that AT&T agreed to last year broke with traditional industry practice and was criticized by many analysts and investors. In the long run, wireless carriers earn more from recurring monthly revenue than they do by initial handset sales.
Newer iPhones, which add features such as speedier Internet access, are priced to sell 50% below the first generation of models. An 8-gigabyte version, for example, will cost $199 compared to $399 now. A 16-gigabyte version will cost $299. Apple introduced the next-generation device at a developer conference in San Francisco.
AT&T hopes millions of additional customers will buy the iPhone at the reduced prices, allowing the company to sell more data service on top of monthly phone-calling plans that start at $40.
AT&T's data plans for the iPhone range from $30 to $45 a month, meaning each iPhone subscriber would spend at least $75 a month -well above what most U.S. mobile customers pay.
BMO Capital Markets analyst Peter Rhamey estimated the lower prices could capture 3 million to 5 million new customers in each of the next two years.
"While we are disappointed by the near-term impact, the trends in the wireless market remain positive and AT&T appears well-positioned to capitalize on growth in this segment," Rhamey wrote in a note to clients.
The new strategy was unveiled against the backdrop of a slowing U.S. economy and expectations that subscriber growth in the U.S. market will also slacken. Most Americans now own a wireless device.
The result is that wireless carriers increasingly will look to steal customers from their rivals and entice subscribers to spend more on data plans. AT&T, for instance, said its iPhone customers spend about twice as much per month as its other subscribers.
With a lower-cost iPhone in its holster, AT&T believes it has a great weapon to aim at competitors such as Sprint Nextel and even Verizon Wireless.
"This will deliver clear benefits for AT&T and will be hugely positive for the future of our business," de la Vega said in a conference call with analysts.
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