01:33 PM

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.

The iPhone may be your next full-function computer. InformationWeek has published an independent analysis of this topic. Download the report here (registration required).

Comment  | 
Print  | 
More Insights
InformationWeek Elite 100
InformationWeek Elite 100
Our data shows these innovators using digital technology in two key areas: providing better products and cutting costs. Almost half of them expect to introduce a new IT-led product this year, and 46% are using technology to make business processes more efficient.
Register for InformationWeek Newsletters
White Papers
Current Issue
Twitter Feed
InformationWeek Radio
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.