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


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.