AT&T's overdependence on the iPhone may pose some risks

24 October 2008

When AT&T entered into an exclusive arrangement with Apple to support its iPhone in the American markets, it was considered an extremely beneficial deal for the cellphone carrier. And this belief was reinforced when the iPhone and its successor, the iPhone 3G, notched up record sales.

However, the popularity of the device has now come back to singe the company's profits. (See: Apple, AT&T sell 1 million new iPhones in 3 days; users download 10 million applications)

In order to subsidise the iPhone, AT&T had to pay Apple a substantial amount for each device sold, in exchange for, service usage by customers, who would pay AT&T for these services. AT&T had hoped such usage by customers over an extended period of time, would help it recoup what it had paid Apple, and make a tidy profit, as well.

Now, AT&T has found out that it has had to pay out an enormous amount this quarter for the privilege of the iPhone partnership, $900 million to be precise.

This has raised concerns whether AT&T can make profits from the two-year contracts iPhone users in the US are tied to. The company on Wednesday reported adjusted third quarter earnings of 67 cents a share, four cents below Wall Street estimates. What's notable is the reason AT&T fell short of its targets: The adjusted figure includes a 10 cents a share hit for iPhone 3G subsidies. To put that into perspective AT&T took a $145 million, or 2 cents a share, hit due to costs related to hurricanes.

While neither company is wholly dependent on the iPhone for revenue, the device does influence stock performance. And it appears Apple got the better end of the deal. Since the debut of the original iPhone in June 2007, AT&T shares have fallen by 37.6 per cent. Apple stock has fallen 19.1 per cent.