Did AT&T get a sour apple when it snagged the iPhone?
Maybe. AT&T's exclusive right to offer Apple's smart phone over the past two years has attracted new customers, and at least initially enhanced the phone company's image. But it is difficult to know whether those benefits are worth what have been some considerable costs, both short and long term.
For investors, and for federal regulators investigating such exclusivity deals, it is worth considering some factors. While AT&T has disclosed at least 10 million activations of iPhones since it became available in mid-2007, only about 40% of those were new customers. That number dropped to 35% in the most recent quarter when the 3GS phone became available.
That means only four million new customers signed up, about 5% of AT&T's total, or 6% of "postpaid" customers on costly monthly contracts. Complicating the math is that some activations represent upgrades from earlier iPhone versions. AT&T said last month that it had about nine million iPhone customers.More important, perhaps, is that the iPhone likely has kept some AT&T customers from defecting. AT&T's churn, the percentage of customers who leave, has dropped to 1.49% from 1.7% since the third quarter of 2007. Over the same period, Verizon Wireless's churn has risen to 1.37% from 1.27%.
Then there is the extra revenue. AT&T has consistently said iPhone customers generate much higher revenue per user than the average, close to $100 a month. AT&T's "postpaid" average revenue per user has risen 4.7%, to $60.21, since the third quarter of 2007.
But partly offsetting that revenue is the reported $400-a-phone subsidy that AT&T has paid Apple since June of last year. That implies an iPhone customer brings in nearly $2,000 of revenue over the life of a two-year subscription, after recouping the subsidy cost.
Even so, J.P. Morgan Chase analyst Mike McCormack, who is skeptical of the return generated for AT&T from the iPhone, notes that AT&T has said other smart phones -- carrying a much lower subsidy -- tend to generate similar average-revenue-per-user levels as Apple's device. The iPhone subsidy has depressed AT&T profit margins. The metric AT&T emphasizes for its wireless division, operating income before depreciation and amortization, as a percentage of service revenue, has dropped from 41.2% in the second quarter of 2008, before the subsidy began, and has bounced in a range of 33.5% and 40.9% since. AT&T has said repeatedly it expects the margin to rise to the mid-40s long term.
And that margin doesn't reflect the impact of capital expenditures required to upgrade AT&T's network capacity so it can handle the average iPhone users' heavy Internet habits.
It is no secret that iPhone users download games, video and other Web data at two to four times the rate of other smart-phone users. Yet AT&T charges the same $30-a-month fee for unlimited data use it levies on its other smart-phone customers.
The heavy iPhone Web habits have strained AT&T's network, now the subject of numerous complaints. Sanford C. Bernstein analyst Craig Moffett noted AT&T's name was "jeered at every mention" by application developers at an Apple conference in June.
AT&T is taking steps to improve its 3G performance, but the damage to public perception of its network may be difficult to repair.
It is possible Verizon's network would have reacted similarly if that company had offered the iPhone. No matter: It seems likely that if Verizon eventually gets the right to offer the iPhone, some of those four million customers who signed up for AT&T may defect. Indeed, some of the older AT&T customers also may go. So whatever value AT&T got from the device, it seems clear that Apple was the real beneficiary.
