The new 3G iPhone has changed the game plan for AT&T (T). AT&T is still the exclusive carrier in the U.S. and the iPhone comes with a 2-year plan, but AT&T will no longer be sharing subscription revenues with Apple (AAPL).
Instead, it would pay it upfront and offer the iPhone with a subsidy at an attractive $199 for the 8GB model, and $299 for the 16GB version. The subsidy ranges from $200 to $400 and is expected to hurt AT&T’s profits by $0.10 to $0.12 per share in 2008 and 2009.
However, AT&T will make up for this with a $10 per month increase in data plan rates and the increased sales, including, hopefully, new subscriber additions. Up until now, Apple has sold 6 million iPhones and with the 3G iPhone, it is easily expected to cross the 10 million mark in 2008.
In an earlier post we saw how the high-spending iPhone customers bring in an average $95 per month. AT&T could turn the subsidy into a strong marketing expense that gets them the cream of the high-spending cell phone customer base that the iPhone always attracts.
Although Apple wont be getting subscription revenue any longer, it still makes good margins, with Portelligent teardown reports suggesting a bill of materials of just $100 per phone.
With Verizon (VZ) announcing its plans to acquire Alltel for $29.1 billion earlier this month, competition in the wireless industry seems to be heating up. With this acquisition, Verizon will see its customer base going up to 80 million, compared to AT&T’s 71 million. AT&T would be losing its Number 1 position in the industry. The iPhone subsidy would seem like the right move in this scenario to catch up in subscriber-count. Verizon is also expected to be the exclusive carrier for Research In Motion's (RIMM) Thunder, which is supposed to be an iPhone competitor with touch screen and 3G features.
In addition, the iPhone subsidy is most likely to trigger another price war in the industry. Verizon would be under pressure to rival AT&T’s subsidy on Thunder. The Thunder is expected to be released in the third quarter and if it matches the iPhone price, AT&T might find it hard to take away Verizon’s customers, and will have to look elsewhere. Sprint (S) is likely to bear the brunt of it all.
It would be interesting to see who will emerge the winner in this race. The race between RIM and Apple spills over to their exclusive carriers, Verizon and AT&T. RIM has good track record of delivering strong products, so RIM-Verizon may offer AT&T-Apple a tough fight. What I also like about the situation is that there are at least two strong camps emerging, from which eventually consumers would benefit. Imagine how boring it would be if only Apple were playing in the major league?
AT&T is currently trading around $37 and has a market cap of $217 billion. The market is not reacting too well to its subsidy. Verizon is also trading around $37, but has a market cap of $106 billion.
Click here for a relevant Business Week article: "The iPhone’s Impact on Rivals"
Disclosure: None
