iPhone subtraction could be addition for AT&T
AT&T shouldn’t fear losing its iPhone exclusivity. The contract could run out by early next year, though neither AT&T nor Apple is saying. If it does, AT&T’s customer growth would probably slow. Yet if rival Verizon were to land the iconic smart-phone too, the industry’s pricing model would improve — along with returns from AT&T’s existing iPhone customers.
A mass customer exodus is unlikely. Some users in big cities complain about AT&T’s coverage and dropped calls. But the percentage switching to a rival carrier would probably be low, based on the iPhone experience in France and the UK. Most consumers have contracts that aren’t near expiration. Switching incurs a termination penalty, and would require the purchase of a new iPhone.
The bigger immediate effect would be slower growth. AT&T’s share of the U.S. market has risen to almost 30 percent thanks to the iPhone. The company added 1.9 million new wireless subscribers in the first quarter, more than 45 percent of which were iPhone users who ditched other carriers.
A slowdown might not be so bad for AT&T shareholders. The iPhone’s success has prodigiously increased demand for data. But all these new customers may not be providing enough of a return to justify the cost of acquiring them and building out the needed infrastructure. Sanford Bernstein analysts reckon iPhone subscribers might be worth nothing to AT&T.
It may seem paradoxical, but losing iPhone exclusivity could be addition by subtraction for AT&T. The industry has priced data plans poorly. Smart-phones traditionally came with all-you-can eat policies. With the most popular phone, AT&T has attracted gluttons. It recently switched to a tiered model for new customers, who pay for more usage.
Rivals have so far resisted following suit. This hurts AT&T. If Verizon were to land the iPhone, however, it would probably adopt tiered pricing too, to avoid inheriting AT&T’s least-profitable customers. Others might also then join in to keep up with the market leaders.
AT&T trades at about 10 times its forecast 2011 earnings, according to Thomson Reuters estimates — a 15 percent discount to Verizon. That suggests investors are overly worried about just what losing the iPhone means to the bottom line.