Wireless paradox: AT&T's investment in the iPhone could backfire

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In January 2007, when Apple (AAPL) first announced that its new, sleek iPhone would be offered only through AT&T (T), it was considered a monumental win for the carrier. Not only would the iPhone bring many new customers to AT&T, but they would be high-paying customers who would buy expensive data plans and linger on the network, racking up minutes and charges. Even as recently as this spring, AT&T credited the iPhone with saving it from the negative fallout of the struggling U.S. economy.

Now, in a paradoxical twist, it seems that its relationship with the iPhone could hurt AT&T. According to an analyst quoted in the Globe and Mail, sales of Apple's iPhone are actually eating away at AT&T Mobility's adjusted income operating margins. The reason: AT&T heavily subsidized the latest iPhone 3GS to bring in new customers, paying as much as $300 for each device. The idea was that by subsidizing the cost, AT&T would have enough scale to bring in more than 4.5 million subscribers paying at least $70 per month. At that scale, the high customer acquisition costs would be diminished.

But now, it looks like AT&T hasn't brought in as many customers as it expected and those $300 subsidies could actually end up wreaking havoc on AT&T's income statement, bringing down its operating margins by 3 percentage points. In June, AT&T said that it expected margins in the low 40 percent range. Now, it looks like it will more likely be in the high 30 percent range. The damage could be even greater if, after the two-year contracts expire, subscribers decide to back out, perhaps moving to a different carrier.

To make things more complicated, AppleInsider says that AT&T can't just walk away from the iPhone. If AT&T were to pull out of the relationship and Apple got a new carrier, chances are the iPhone's devout followers would switch as well.

What all this means is that Apple is in the driver's seat and it's taking AT&T along for the ride. They'd better hope its not too bumpy. AT&T reports its second quarter earnings on July 23.

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