AT&T sacrifices profits to snare iPhone 3G users
Published: 10 Jun 2008 11:40 BST
A newly negotiated deal with Apple could hurt exclusive US iPhone carrier AT&T in the short term, but the mobile-phone carrier sees a big upside for the future.
Following the much-anticipated launch of the iPhone 3G at an Apple event in San Francisco on Monday, AT&T announced that it had struck a new deal with Apple. The new arrangement between AT&T and Apple is similar to contracts AT&T has negotiated with other smartphone manufacturers, such as RIM and Samsung.
Since the first iPhone was launched last summer, AT&T and Apple have shared ongoing revenue from iPhone users. But now AT&T will pay the upfront cost for the iPhone 3G and subsidise the total cost of the phone by making customers agree to a two-year service contract.
The arrangement will benefit consumers by allowing the new iPhone to be sold at a much lower price point. The 8GB version will cost only $199 (£102) and the 16GB version will sell for $299 with AT&T's subsidy. This puts the iPhone on par with other smartphones, such as RIM's BlackBerry and Samsung's BlackJack.
However, the new deal comes at a price. AT&T executives said on a conference call with analysts and investors on Monday that the arrangement will put pressure on the company's profit margins and dilute earnings for the next year and a half. With that said, the company believes that the new price point and improved web-surfing experience of the iPhone on AT&T's 3G wireless network will drive sales of the iPhone and get more customers using its data services.
"Less than 20 percent of our customers have integrated devices," Ralph de la Vega, the head of AT&T's mobile business, said during the conference call. "And, at the $199 price point, we could have mass adoption and put the iPhone in the hands of people who have never surfed the web on a phone."
What's more, AT&T sees iPhone users as highly valuable customers. Executives said that they are willing to make upfront sacrifices to get these customers on their network.
Specifically, iPhone users typically generate more revenue than basic AT&T cellular customers because they use more data services, de la Vega said. With the new 3G capability and more applications coming to the phone, executives expect that trend to increase. iPhone users are also more willing to recommend the device to friends and family. In addition, the churn, or rate at which users drop the iPhone and the AT&T service, is very low compared with customers using other devices.
"The 2G iPhone experience helped us understand what the customer characteristics are likely to be," Rick Lindner, chief financial officer of AT&T, said during the conference call. "These are high-value customers."
As a result of the new arrangement, iPhone users will subscribe to the same kind of voice data plans already offered to other AT&T smartphone customers. This means that, as part of the two-year contract commitment, customers will be required to have at least a $39.99 voice plan. They will choose from one of two data packages. Consumers will get the full smartphone data package for an additional $30 extra per month. Business users who want corporate email can select a data plan for an additional $45 per month.
The new AT&T iPhone 3G data pricing means that consumers will now pay $10 more per month for the data service. The original iPhone data plan, launched a year ago, costs $20 a month. An iPhone 3G must be activated in either an AT&T or Apple store, and customers must agree to the two-year service contract with AT&T, de la Vega said.
Credit: AT&T's iPhone 3G subsidy will cost 'em from CNET News.com
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