What AT&T's New Pricing Structure Could Mean for Apple's App and iAd Businesses

 |  Includes: AAPL, T
by: Trefis

Apple (NASDAQ:AAPL), which competes with Google (NASDAQ:GOOG), Research in Motion (RIMM) and Nokia (NYSE:NOK) in the smartphone market, is the leader in mobile phone apps with around 225,000 apps available in its app store. Apple makes money from paid applications downloaded by users of iPhone, iPad or iPod Touch devices, and will start making money from advertisements from free apps through its newly developed iAd mobile advertising platform.

AT&T (NYSE:T), the exclusive mobile operator of the iPhone in the US, recently introduced tiered plans for data use on mobile phones. We believe that such tiered data pricing plans could have a negative impact on the app and iAd businesses of Apple if iPhone owners were to limit their use of apps to avoid paying higher monthly data fees.

AT&T Introduces Tiered Data Plans

AT&T’s decision to create tiered data plan pricing is driven by the explosion of data consumption in recent years as a result of smartphones that make the internet and mobile apps accessible to a wide group of subscribers. Apps that involve games or videos consume significant mobile data bandwidth and rising use of such apps has also helped precipitate the changes in AT&T’s pricing.

Previously, AT&T had charged users a simple $30 per month for unlimited data usage on smartphones. Now, subscribers that use less than 2 GB of data per month will be charged only $25 per month, but those who exceed that threshold will face additional charges.

Apple’s Apps Business Could Suffer

We estimate that Apple’s apps business constitutes about 8% of the $296 Trefis price estimate for Apple’s stock. We believe this step from AT&T could have strong implications for Apple’s apps business as users may be discouraged from downloading additional paid apps, thereby impacting Apple’s paid apps business, and use of free apps could decline, thereby impacting Apple’s iAd business.

1. Sales of Lucrative Game Apps Could Slow

Games constitute the highest number of paid app downloads for Apple and are also amongst the highest priced apps. Since games consume significant amounts of bandwidth and consumers spend more time on games than most other apps, the impact of AT&T’s data pricing policy could have a significant impact on the lucrative game app business.

If consumers become reluctant to purchase game apps from fear of additional data charges, there could be a downside of 1% to the $296 Trefis price estimate for Apple’s stock as the percentage of paid app downloads declines from around 4% in 2009 to 3% by the end of Trefis forecast period rather than increase as we currently forecast.

2. Apple’s iAd Business Could Suffer

Apple will debut its iAd platform in July 2010 through which the company will earn money from ads that run while users use free apps. Apple benefits as users spend more time on apps, meaning more ad impressions and more ad revenues for Apple.

AT&T ’s decision could discourage users from using free apps for too long, as it increases their risk of exceeding the data cap limit.

There could be an additional downside of 1% to the $296 Trefis price estimate for Apple’s stock if ad impression per iPhone, iPad or iPod Touch device declines from around 300 per month in 2010 to around 240 per month by the end of Trefis forecast period instead of an increase as we forecast.

Disclosure: No positions