If you thought AT&T has been taking their Apple iPhone exclusivity deal to the bank for the past couple years, you’d be wrong. But, it’s okay, AT&T was thinking the same thing. A new WSJ article points out that AT&T may have been getting the short end of the iPhone stick all this time. Apple, on the other hand, has been reaping the benefits.
Rather than raking in profits and expanding their customer base, AT&T has seen their profits margins erode and their network boosted by just five or six percent of their total subscriber count. AT&T’s most recent earnings report showed that the carrier’s 2Q profits were down 15% compared to last year – likely due to the high subsidies AT&T pays to give their customers a good price on the iPhone. What about the 10 million, or so, activations that the Apple iPhone has garnered AT&T since 2007? Turns out, only 40% came from new customers. That means just 4 million new users made the jump to AT&T for a chance to use the iPhone.
AT&T’s profit margins have been hurt in the short term. The carrier has seen its “operating income before depreciation and amortization” drop from 41.2% to between 33.5% and 40.9% since the iPhone was launched all those years ago. But, to its credit, AT&T generates a higher average revenue per user (ARPU) from iPhone users — although some will say that competing smartphones can drive similar ARPU — with $100 monthly rate plans. The carrier is betting that the higher revenue generated from iPhone users will help them increase their profit margins to the mid-40s in the long-term.
All the while, Apple has been enjoying success after success with the iPhone. The AppStore is a hype machine, with the cash flow to back it up. The iPhone is penetrating more markets faster than even Apple expected. Apple also enjoys the highest profit margins of all smartphone makers.
The real problem here is the damage done to AT&T’s reputation. With mandatory $30 data plans attached to all AT&T iPhones in the US, iPhone users are more likely to use the heavier data features of their smartphone. The flood of wireless data usage has strained AT&T’s 3G network to the breaking point. It’s so bad that the mere mention of “AT&T” to most major city dwellers will get you a sneer or a chuckle. That sneer will be the AT&T customer’s disdain for their carrier’s poor network performance. The chuckle will be a Verizon Wireless customer laughing at you and your expensive phone that drops calls like a B-movie producer drops names in Hollywood.
AT&T is working to improve their 3G network, but it’s not going to be able to quickly repair its image. That’s a big problem.
And, with Verizon Wireless gearing up to launch their 4G LTE network, possibly with an iPhone of their own shortly thereafter, AT&T has more reason to worry. Will AT&T iPhone customers stick around if Verizon gets an iPhone-like smartphone of its own?