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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