Wireless giant AT&T (T 2.35%) has an enormous base of iPhone users, many of whom are using older models. During a recent conference, the company declined to disclose exactly how many iPhone users are on its network. But with the iPhone having a market share above 50% in the United States, and with AT&T having nearly 90 million postpaid phone subscribers, we're likely talking about many tens of millions.
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Key Data Points
Each year, Apple (AAPL +0.72%) releases a new family of iPhones. These launches used to be a big deal, but lately, improvements have been incremental. Apple still sells an incredible number of iPhones, but those using older iPhones usually don't have a good reason to upgrade.
A lack of enthusiasm for new phones is one reason why AT&T's churn rate is so low. AT&T's postpaid phone churn rate was just 0.7% in the second quarter of 2024, which translates into very few subscribers jumping ship. A phone upgrade is a natural time for wireless subscribers to consider a new carrier, especially considering the proliferation of deals and promotions.
Apple is trying to rekindle the iPhone fire with Apple Intelligence, an umbrella term for new AI-powered features coming to select iPhone models. The just-announced iPhone 16 family will support Apple Intelligence, as will some high-end iPhone 15 models. While Apple Intelligence is still a work in progress, it will include a better version of Siri, AI writing tools, AI image tools, and the promise of data privacy.
AT&T isn't worried
A new iPhone launch can create two related problems for AT&T. First, rivals like Verizon may decide to be aggressive with promotions in an effort to poach subscribers. While AT&T has been consistently growing its wireless subscriber base, Verizon has been struggling to do the same. If iPhone users find these new AI features compelling, Verizon could see an opening to reverse its subscriber trends by offering big discounts, potentially muting AT&T's subscriber growth trends.
Second, if AT&T decides to fight back with big discounts and heavy promotions of its own, the company could lose even more than it typically does selling phones. AT&T turned a small loss on equipment sales in the second quarter, but that loss could explode if the company is forced to match promotional activity from rivals.
AT&T CFO Pascal Desroches isn't particularly worried about any of this. When asked if he was concerned about this iPhone cycle driving customers to rivals, Desroches said:
No. I'm really not because we've lived through iPhone launches before. And we are prepared. We're going to be competitive in the market, but disciplined. We always have, and we will continue to be disciplined.
Not too late to buy AT&T stock
While it's possible that Apple's new AI features could drive increased upgrading, for the most part, Apple isn't introducing anything new. AI writing and image tools are a dime a dozen, and it'd be hard not to improve Siri, which has languished for years. Apple Intelligence is still in beta, so its usefulness will be limited until more features roll out.
Apple's slow rollout of its AI features may make an iPhone "super cycle" unlikely, which means that AT&T has little to worry about. The company expects to generate free cash flow between $17 and $18 billion this year, which puts the price-to-free cash flow ratio below 9. The stock has surged this year, but it's still inexpensive.
While something may eventually push the wireless industry out of its low-churn era, the first AI iPhone probably won't be it.
