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7/15/2009
01:33 PM
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AT&T's iPhone Subsidies Could Hurt Margins

The success of the iPhone 3GS may depress AT&T's operating margins by 3%, but Apple's touch-screen device will benefit the carrier long term.

The success of Apple's iPhone may hurt AT&T in the short term by depressing its margins, analysts told the Globe and Mail.

The touch-screen smartphone has been a boon for AT&T because it has poached numerous customers away from rivals Verizon Wireless, T-Mobile, and Sprint Nextel. In order for the carrier to price the handset at a reasonable level, it has to subsidize each handset by at least $300, analysts said. This could lead the second-largest U.S. carrier to see its operating margins decline as much as 3% when it reports its quarterly earnings July 23.

Industry watchers said this is more than AT&T estimated, as the iPhone 3GS outpaced most analysts' expectations by selling more than a million units during its launch weekend. For the first iPhone, AT&T had a non-traditional deal that gave Apple a monthly share of revenue from iPhone users. The company changed that practice with the launch of the iPhone 3G, and moved to the industry-standard practice of buying the phones and then reselling them at a discounted price.

AT&T said subsidizing the device would hurt its bottom line in the short term, but said it would add to profits by 2010 because iPhone customers are tied to a two-year contract with a mobile data package. This strategy is bumping into some unforeseen problems though, as many first-day iPhone 3G buyers were upset to learn they could not get the iPhone 3GS at the $199 and $299 price point. While AT&T altered its upgrade policy for some customers, many iPhone users had to pay a $200 premium for Apple's latest touch-screen smartphone.

Despite short-term issues, AT&T is reportedly fighting hard to extend its exclusive iPhone agreement because the handset has been a major driver of new customer growth. However, there are persistent reports that Verizon Wireless will soon get a device made by Apple.


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