AT&T Bitten by Apple

Top telecom carrier AT&T (NYSE: T  ) knew that too much of a good thing was going to come back to bite it months ago. But even though the company warned investors that subsidizing the latest generation of the Apple (Nasdaq: AAPL  ) iPhone would be costly, it didn't think it would be hit so hard so fast with a $900 million drag on profits this quarter.

The bright side, of course, is that AT&T activated a ton of iPhones -- approximately 2.4 million since July 11th. The reported "pressure" on its profits equates to roughly $375 in subsidies per iPhone. The justification is in the long-term value of these users -- not only do 40% of them come from competing carriers like Verizon (NYSE: VZ  ) , Sprint Nextel (NYSE: S  ) and Deutsche Telekom's (NYSE: DT  ) T-Mobile, but they spend a lot more and churn a lot less than the average subscriber.

In terms of net wireless subscriber additions overall, AT&T basically matched last year's third quarter performance by bringing in two million new subscribers. Rounding out its major offerings, AT&T also added 148,000 new wireline broadband customers and 232,000 U-verse TV subscribers. The ramp up in U-verse TV subscribers also gives AT&T a total of 781,000 users now, well on its way to its target of at least a million by the end of 2008. Overall, this performance gave AT&T a solid quarter, with $31.3 billion in revenue and $3.23 in net income.

What stands out from AT&T's results is the huge impact of the iPhone. While some have pointed out this heavy dependence means the rest of the wireless business is weak, this is a faulty argument. AT&T is purposely chasing high-end customers at the expense of the lower end. The company is putting more resources into top-tier devices, such as Research In Motion's (Nasdaq: RIMM  ) new Blackberry Bold due out November 4th at a price of $299. These releases dwarf the "get 4 cheap Nokia (NYSE: NOK  ) phones for only $99" ads that were more common before Apple jumped into the fray.

Even though I'm not a current AT&T investor, I would welcome the carrier's focus on the more profitable high-end. Even though I'd expect the growth in numbers to slow, each subscriber is more valuable and dependable. Though not a guarantee, this gives me more confidence in the continued cash-generation capability and the generous 6.6% dividend yield.  

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Fool contributor Dave Mock has switched from checking coin returns on paper machines to scanning abandoned lottery tickets. He owns no shares of companies mentioned here. Sprint Nextel and Nokia are Inside Value picks. Apple is a Stock Advisor recommendation. The Fool's disclosure policy doesn't need a secret decoder ring and won't lead to a shamelessly-plugged advertisement.


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  • Report this Comment On October 22, 2008, at 3:28 PM, MasterRoshi wrote:

    I could have sworn I overhead on morning TV news that iPhones outsold Blackberry's this last Q, but it wasn't specific as too 'units' vs $$$. Either way, not bad for it being Apple's one-trick-pony in the telecom market.

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