Why AT&T Is Desperately Addicted to the iPhone

52 Comments

A few weeks ago, AT&T (s T) CEO Randall Stephenson told the Wall Street Journal that his company was interested in extending its exclusive contract with Apple (s AAPL) through 2011. It was interesting to see a senior executive at one of world’s largest telecom companies tip his hand publicly. Fast-forward to today, when Ma Bell reported its first-quarter 2009 earnings, and you start to get a handle on why AT&T is hooked on Apple and so desperately needs it to introduce new iPhone models. First a little math from their earnings release: AT&T added 875,000 new postpaid subscribers in the most recent quarter and 1.6 million iPhone activations, “more than 40 percent of them for customers who were new to the company.” That means roughly 640,000, or a whopping 73 percent of their total net new subscribers, came to AT&T because of Apple’s iPhone.

To better illustrate the growing Apple addiction at AT&T, let’s go back to AT&T’s fourth-quarter 2008 results. During that three-month period nearly 1.9 million 3G iPhones were activated, and 40 percent of them, or about 760,000, were new to AT&T. In other words, 36 percent of AT&T’s new customers signed up because of the iPhone.

From a revenue perspective, during the first quarter of 2009, the average iPhone user gave AT&T about $94.74 a month vs. an average postpaid AT&T customer, who spends about $59.21 a month with the company. (Actually if you took all iPhone monthly subscriptions out of the equation, that number would be even lower.) At $94.74 each, the 640,000 net new subscribers bring in about $60 million a month in additional revenues for AT&T. Given how drastically AT&T’s landline and business voice sales are tanking, it makes sense why AT&T is so desperately stuck on the iPhone.

“Those numbers underscore why the exclusivity and the refresh of the (iPhone) product line are pretty important for AT&T,” said John Hodulik, telecom analyst with UBS Research. Like most, he expects Apple to introduce new phones sometime this summer. We’ve heard rumors of both a new higher-end device as well as a lower-priced one. Whatever form they come in, they will be crucial for AT&T, which has even started to spend money on upgrading its pokey 3G networks to meet the data demand.

The AT&T and Apple relationship can be best summed up by the 80s pop band, Huey Lewis & the News:

We’ve had some fun, and yes we’ve had our ups and downs?
Been down that rocky road, but here we are, still around?
We thought about someone else, but neither one took the bait?
We thought about breaking up, but now we know its much too late?
We are bound by all the rest
Like the same phone number

?All the same friends
And the same address
?
Yes, it’s true, (yes it’s true) I am happy to be stuck with you

Also: Saul Hansell at The New York Times outlines reasons on why AT&T needs to keep iPhone away from Verizon. He talks about LTE amongst many reasons.

52 Comments

James

AT&T is holding on the iPhone because it is the hot brand name among the younger folks. Toyota had to do it with Scion. Toyota for the longest time was unable to find a niche into the younger generation. Scion achieve that and also found a new niche woth older folks that latched on also. AT&T had to do this smae thing and iPhone is their Scion.

Elisabeth

AT&T isn’t feeling Apple love in my neck of the woods. I tried to upgrade to an iPhone today — initially, they told me I was eligible for a free upgrade. Then they decided I wasn’t and announced I could only have it if I paid the $399.00 in-store cost.

I can’t afford that, and I said never mind, if I do anything, I’ll break my contract with AT&T because I was sick of the back and forth. Knowing I was angry, they promptly began trying to sell me AT&T/Samsung’s Eternity, and trash tracking the iPhone and their deal with Apple. Magically, I am eligible to upgrade to that device, but not the iphone — and they’d be making less money a month with the Eternity!

It was bizarre. If this is an indication of how AT&T runs all their outlets, they will cut their own throat, and have no clue how good this Apple deal is. Right now, I have a bare bones cell phone — I am going to them, cash in hand, and offering to upgrade my services and lock myself into another contract … and they try to talk me out of it? They complain about it? Poor business all the way.

cinerina

It’s funny because despite my near-overpowering lust for the iPhone, I have not yet made the switch (from Sprint, no less) BECAUSE of AT&T. I bet Verizon still wakes up in the middle of the night in a cold regretful sweat.

Iren

Nokia is bellwether for global cell phones business. Chip suppliers to handsets makers will benefit when cell phone business stabilizes and grows. I like and own shares of CAMD, which receives 70% of its revenues from handset companies including Samsung, LG, Nokia and Motorola. CAMD has strong balance sheet (lots of cash, no debt) and EV/ sales lower than most tech companies. I feel that RFMD, TQNT, QCOM and SWKS are good chip companies but CAMD is a better investment.

Michael

the figures of new customers where 70% is from iPhone, looks very interesting, however I would like to see if they have a net add of new customers, how many left AT&T.

mrblogdotorg

There is still an AT&T? I don’t think anyone noticed.

anonymous

I agree that users who want iPhone become subscribers for AT&T. However the conclusions such as “73 percent of their total net new subscribers, came to AT&T because of Apple’s iPhone” seems flawed. You cannot rule out the possibility that some of these new users wanted to become AT&T subscriber and they chose to go with iPhone as their device!

Suzanne

Om, I have to say I absolutely adore the Huey Lewis reference! Thanks for the inspiration to dust them off of the unplayed list and rock out. Oldie but a goodie!

Adam Jackson

I honestly feel that the benefits with Apple & AT&T are mutual. Apple made “butt-loads” of cash off the 1st year of iPhone sales prior to any subsidization and I think apple still makes money from our monthly service contracts, right?

AT&T also allowed apple to do the app store, visual voicemail and put iPhones in the forefront of AT&T marketing and store fronts. I don’t think T-mobile or verizon would have given Apple that kind of love back in 2007.

Gadget Sleuth

Cause it’s saving their bacon, that’s why they’re “addicted” to it. They’re addicted to customer growth and making money, like any sensible company.

aravinthan

I Hope Apple soon opens up to multiple providers and it helps all users happy.. some of my friends would be more than happy to get an iphone…

Brian

disclaimer – I work for a competitor of AT&T

So, I would be pleasantly surprised if AAPL re-upped the exclusivity with T. The money they are leaving on the table is significant.

Let’s assume similar iphone buying trends and do some quick back of the napkin estimates:
• 60% upgrades; 40% new
• T. 1.6M iPhone activations and 60% of these are upgrades = 960k iphones from the postpaid base
• And at the beginning of Q1, their iphone addressable base was 60M
• Assume 10M iphone activated previously = 960k / (60M – 10M ) ~ approximate upgrade rate = 2% per qtr
• Then bring in the postpaid bases from the other carriers (VZ, S, TMO) = 131M customers
• Apply the 2% upgrade rate = 2.7M new iphones per qtr opportunity from the other carriers as their customers upgrade to the iphone
• I am ignoring gross adds/new customers intentionally

2.7M new potential customers per qtr is a significant market opportunity for AAPL to walk away from. 2.7M * $450 (recognized hardware rev, piper jaffray) = $1.2B per qtr. Emmmm…Slurp… ;-)

It would interesting to see how much Jack T is willing to throw down to keep that from happening knowing that their Gross Add spigot will be drastically ratcheted down. I don’t think T can afford to make up that difference and AAPL can’t afford (especially with declining sales in Macs and margin hits) to not give it a go. AAPL usually follows the money.

But, hell, I have been wrong many times before.:-)

gbp

OTOH,
APPLE is missing 100 plus million customers ( Verizon, SPRINT, TMobile) .
Can you do the math on how much money APPLE makes on this 100 plus million ?
The music, the apps, the videos …. hmmmm, I wish APPLE would say thanks to ATT and open it to other carriers.

gbp

Om,
Couldn’t agree with you more. The extra money is all it matters.
ATT probably is not spending much on expansion. They should use this money to build more towers.
But the days of paying 90 bucks for data services on phone are numbered.
Have you seen the pricing of boost mobile ?

Christina Viering

The iphone is so easy to use compared to imitators.

SD

but Om you did not mention that Apple is equally beneficiary in this and Apple must also be enjoying its margins from AT&T.

Krishna Baidya

iphone came like a “single” miracle product that brought the much needed exuberance to ma bell, which otherwise probably be busy battling to compensate fixed line revenue decline. no wonder Randall is all ga ga about iphone. i guess now, Randall’s team should focus a bit more on the network side to enhance the user experience.

Lasha

If a single product did something of that sort for my own company, I would be just as addicted, haha. I can guarantee that AT&T is gonna have a lot of trouble keeping up with the 3G requirements of the iPhones, as well as the other phones on their network if they fail at those upgrades. I mean, upping to 7.2Mbps is better than the ~3 that there is now.

Hmmmmmmm, I still love my iPhone since day one. :)

macdad

7.2Mbps? I read 21 Mbps would be next – why waste time with intermediate steps?

RechargeYourMind

Totally agree. What I don’t understand though is why Verizon (being such a large company) couldn’t offer a sweeter package to Apple to get the Iphone.

seeking venture capital

If Apple does renew a contract with AT&T, I just hope that this time around they show more leverage for the consumer with their negotiations. It is understandable why they did not have a native video app for the 2G and 3G models, the network is slow enough as it is and the video may have caused further problems. A commitment by AT&T to upgrade their network – http://gigaom.com/2009/04/20/att-to-boost-3g-speeds-network-capacity/ – in a VERY short time frame should be an absolute must.

– Jason Nadaf

Om Malik

Jason

I think a live video app on a mobile sounds good in theory. The problem is seriously pathetic networks and lack of capacity. I think waiting till LTE to come around is prudent for mobile video push. With Verizon pushing to launch LTE networks by 2010, it wont be long before AT&T gets its 4G wireless networks rolled out as well. 2011-2012 is my guess on when mobile video really becomes pervasive.

Ty

Until carriers build out fiber to the tower (Verizon, T-Miobile already deploying in most areas,) AT&T’s “peice-milled network will take forever to upgrade.

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