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AT&T to take earnings hit from iPhone subsidies

AT&T to take earnings hit from iPhone subsidies

AT&T Inc.'s profits for the next two years will take a hit as it subsidizes the new low price of the latest iPhones, the company said Monday.
The news sent the carrier's stock down 65 cents, or 1.7 percent, to close at $37.56.
AT&T, which is the iPhone's exclusive U.S. carrier, put the cost at 10 cents to 12 cents per share for this year and next, or roughly $600 million per year.
Carrier subsidies for expensive phones are usually around $200 each. The expected cost figure points to AT&T expecting to sell about 3 million of the new iPhones per year, but AT&T executives did not reveal specifics of the subsidy.
The cheapest model of the new iPhone, announced by Apple Inc. on Monday, will cost $199 when it goes on sale July 11. A model with twice the memory _ 16 gigabytes _ will cost $299. The cheapest model of the first-generation iPhone sold most recently for $399.
AT&T expects the new iPhone to add to its earnings in 2010 when it will no longer be required to share monthly subscriber revenue with Apple. Analysts had estimated these monthly payments at $10 to $15.
The revenue-sharing deal was an experiment, one of many things about the iPhone that turned industry practices on their head. Now, Apple and AT&T are adopting the standard model for the phone business: The carrier pays the handset maker for the phones, then subsidizes the phones to consumers in exchange for a two-year contract.
"We have changed the nature of the agreement to a more traditional wireless model," said Ralph de la Vega, head of AT&T Mobility.
Consumers will be the winners in the short term, as the price of the feature-rich iPhone is cut in half. But AT&T is raising the prices for service plans to start at $39.99 per month, plus $30 for unlimited data. That works out to a $10 increase from the cheapest plan for the first-generation iPhone.
For that price, Web surfing and downloads will be roughly twice as fast as with the first iPhone. AT&T charges $35 per month for unlimited data on BlackBerry phones and Windows smart phones.
Apple's revenue per iPhone will likely be cut, as it is deprived of residual payments from carriers. But its phone could see much wider adoption with a lower price. When the iPhone first went on sale last June, the cheapest model sold for $499.
The new arrangement also will allow AT&T to capture more iPhone buyers because they now must activate the phone before leaving the store. Previously, iPhone buyers could buy the gadget without activating it.
Many phones were "unlocked" so they could be used with other carriers and many were shipped overseas to countries where they weren't available. Analyst Toni Sacconaghi estimated that only half the iPhones sold have been activated with AT&T service.
IPhone subscribers are particularly valuable to AT&T, since they're unusually happy with their phones and pay an average of more than $90 per month for service, compared to less than $60 for other subscribers under contract. Less than 20 percent of AT&T customers have "smart phones" that are able to take full advantage of the company's expensive 3G network.
"The wireless industry is obviously at a key point of transition as we move into a new era of growth that's driven by advanced data services," said Rick Lindner, AT&T's chief financial officer.
Last week, AT&T said its 3G wireless network was operational in 275 markets. The company expects to have it operating in 350 up by the end of the year, when it will have spent $20 billion on wireless network improvements since 2005.


Updated : 2020-12-04 15:18 GMT+08:00