Posted by Eric Savitz
AT&T (T) today confirmed that it will be subsidizing customer purchases of the Apple (AAPL) iPhone 3G. The subsidies are going to hurt AT&T’s 2008 and 2009 earnings; but at least AT&T will remain the exclusive U.S. service provider for the phone.
The company noted that the $199 price announced earlier today by Apple CEO Steve Jobs will require a two-year contract. AT&T will sell the phone at its more than 2,200 retail stores and kiosks, and through direct business sales teams.
The new deal eliminates the old revenue-sharing model, under which a portion of monthly service revenue was kicked back to Apple. Unlimited 3G data plans will be $30 a month, with voice plans starting at $39.99 a month. Business users can get unlimited data plans for $45 a month, plus a voice plan.
AT&T said the new agreement “will likely result in some pressure on margins and earnings” to reflect the costs of subsidizing the phones. The company sees dilution of 10-12 cents a share this year and next, with a 2008 adjusted operating income margin of about 24% and a full-year 2008 wireless OIBDA margin of 39%-40%. AT&T expects the new approach to selling the phones to turn accretive in 2010.
AT&T said it offered 3G service in 280 U.S. markets, growing to 350 by year end.
AT&T shares today fell 65 cents, or 1.7%, to $37.56 in the regular session. The stock fell another 11 cents in after hours trading.
Comments
I hope the street doesnt throw away all the revenue sharing, it still may be possible.
Comment by apple lover - June 9, 2008 at 6:09 pm
It is a mistake to directly associate Apple Inc with aapl stock in any short term way. It is better to hedge your short term betting with small caps. Many Real People are losing out on profit oportunity by being advised to “sell on the news” and other short sighted advice from a reactionary press like that moron “Kramer” and some of what is blogged here. Aapl stock has a very good profit potential over a period of about a year - historically and now more than ever - barring death of its CEO, a major recession or a severe overall market correction. Do a little of your own research. And, by the way, the iphone will not effect Apple Inc’s profit margin in the near future! It may attract more customers to apple products in general, though. The days are gone when one could predict a rise in stock price based on positive news or profit reports from Apple Inc.
Comment by TooHigh - June 9, 2008 at 6:16 pm
I’m sure both Apple and AT&T have done the math and this likely will work out to be the best for both of them.
Apple should realize a huge cash infusion from lump sum activation payments from AT&T right away and AT&T will instantly increase their monthly subscription revenue stream by higher monthly fees and probably a much higher number of subscriptions since the new phone is cheap and has more features.
Comment by Mike - June 9, 2008 at 7:24 pm
I think the main concern at the lower price point for Apple is the threat of unlocked phones but it seems they’re going to mitigate that by requiring in-store activation.
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Comment by Beta - June 9, 2008 at 7:33 pm
Anyone notice that the 3G data plan is going to be $30 rather than $20. So much for that price decrease. And there is a business user plan which costs $45, but its not clear how they’ll differentiate an unlimited plan from a business plan.
Comment by Bickle - June 9, 2008 at 8:30 pm
I’m curious what price ATT is paying for the phones? remember the $199/$299 price are AFTER subsidies. AAPL is getting more than than the sticker price @ the expense of the monthly kick back but they get to keep their 30% of the download revenue.
I think when one looks deeper into this deal, Apple is looking great.
Comment by thom - June 9, 2008 at 8:53 pm
So, .10/share means approximately $600 MM (T outstanding shares are approx 6 Billion). If T expects to sell 5MM add’l iphones this year, that amounts to around $120/phone in subsidy.
Anyway you slice it, it seems that there is no way that T is subsidizing by $200 or $300 per phone unless my assumptions above are off.
Comment by tik - June 9, 2008 at 10:19 pm
of course the above analysis assumes that the 0.10 hit does NOT include the benefits (add’l revenue and profit) from the new subscribers. If it does, then the subsidy could be far higher.
Comment by tik - June 9, 2008 at 10:24 pm
Well, if we calculate conservatively we could say $100, so Apple is still getting $319 and $419 per phone, not too shabby considering that on July 11th the phones will be available in 24 countries and 70 (+ China, without the rev sharing deal there should be no more problems) by years end. I just like T’s bs about it hurting them - they pay $100 for an additional $25/month profit from their plan.
Since the iPhone’s new case is plastic and no longer metal(means better reception) i’ll assume it’s a bit cheaper to make the cases and the guts should only be 10% more expensive. AAPL’s margin might drop by a % or 2 but the market penetration will be massive.
Comment by Anonymous - June 9, 2008 at 10:48 pm
Eric
Are you a journalist? For crying out loud - proof read you copy!
“Business users can unlimited data plans…” NOT a sentence dude!
Comment by jmmx - June 10, 2008 at 2:01 am
