For AT&T, the Golden Age of the iPhone Is Ending


It should be a positive moment for AT&T (T): In June, Apple (AAPL) is expected to unveil its next-generation iPhone, an extension of the lifeline tossed to AT&T's spotty and much-despised mobile business.

And sure enough, AT&T's stock has held up against its main rival Verizon (VZ), declining 6.4% in the past two months of market turbulence. That compares with a 11.9% drop for Verizon. AT&T shares have even held up well relative to the S&P 500's 7.2% drop.

The early leak and much publicized details of Apple's iPhone 4G may have blown a few fuses at Apple's headquarters on One Infinite Loop, but it ended up being a bullish wind buffeting AT&T's stock higher. The new iPhone will be a popular back-to-school item and should continue to sell through the holidays. As the sole U.S. cellular provider for (non-jailbroken) iPhones, AT&T stands to benefit from the new and renewed contracts that make the iPhone's price tag more palatable.

Oppenheimer analyst Timothy Horan expects AT&T to sell 7 million iPhones in the second half of 2010, an increase of 30 percent over the number in the first six months of the year. In the past, new iPhone launches have involved subsidies of $400 per phone, which weighed down AT&T's profit margins and, as a result, its stock. But Horan believes the weight this time will be offset by the already large base of subscribers using iPhones.

"We suspect the newly upgraded iPhone will see strong demand," Horan wrote in a recent report. "For AT&T this has and will continue to drive revenue market share gains, as 30 percent are new subscribers with roughly 60 percent of existing iPhone subs being upgraded to new devices."

But Will It Last?

So AT&T should enjoy the good times while it can. There are increasing signs that they may not last. The iPhone remains popular, but there have been talk for years that Apple may start selling the iPhone through other carriers, notably Verizon. The story is Apple originally approached Verizon about carrying the iPhone, but Verizon balked at Apple's demands. AT&T didn't, and has signed up millions of iPhone subscribers since.

The chatter about Apple reaching out to Verizon has resumed in recent weeks, only this time there's a feeling that it's more than just talk. Verizon's CEO has hinted that Apple is open to iPhones that would work on its fourth-generation networks. Analysts who have talked with Apple's iPhone suppliers say a Verizon iPhone will come later this year.There are even reports that Sprint (S) might carry the iPhone too, which would come as welcome news to Sprint's beleaguered investors, but that remains pure speculation.

The strongest evidence the AT&T may be losing its exclusivity for the iPhone comes from AT&T itself. The company recently said that it's raising -- to $325 from $175 -- the onerous and pointless fees that it charges customers to cancel a mobile-service contract before the full two years. The increase applies to those who either buy or upgrade to a new smartphone, including iPhones.

These early cancellation fees are anti-consumer and discourage competition. Consumers should be able to choose their carriers without them, and if the carriers don't like the defections they should improve their networks. The make no economic sense, except to lock subscribers into ill-managed telecom networks.

AT&T has only one reason to increase them this much, which is to prevent people from buying an iPhone 4G, subsidizing its cost and watching the customer bolt for Verizon a few months later. AT&T's CEO has said he doesn't expect many iPhone owners to flee his company's clogged networks, but Davenport & Co. analyst F. Drake Johnstone thinks 6 million of them will, which is about 40% of AT&T's current iPhone base.

Google Looms

There's a second reason why AT&T might lose some iPhone subscribers even if it holds onto its exclusive arrangement with Apple. That reason is Android, which is looking like a more potent rival to the iPhone with each new release Google churns out. Google's latest upgrade, announced a couple of weeks ago, has been winning rave reviews from bloggers and technophiles. The journalist who writes as Fake Steve Jobs said he's ditching his iPhone for the new Android software.

All of this adds up to pressure on AT&T's earnings, maybe not this year but certainly in the following year or two. Walter Piecyk, an analyst at BTIG assessed the impact in a report that initiated coverage on AT&T's stock with a "neutral" rating.

"We forecast a dire impact based on the loss of exclusivity including the departure of 8 million customers tied to the iPhone in the 6 quarters that follow the loss of their exclusivity and a $6 billion reduction in annualized revenue," Piecyk wrote. "We expect its market share to drop to 20.6% by then end of 2012 from an estimated high of 25% in Q2 2010 of this year and for EPS to decline 14% in 2012."

Consumers have endured Apple's strict controls on iPhone apps just as they've put up with dropped calls and slow data connections on AT&T's network. They may not have to for much longer. And both of those trends are bad news for AT&T.

Originally published