AT&T's iPhone subsidy could hurt carrier's finances, analysts say

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Computerworld - The iPhone subsidy AT&T pays for each device totals about $300 and is expected by some analysts to take a toll on the carrier's quarterly finances when they're reported next week.

While the short-term hit of subsidizing the price of the iPhone could be significant, two analysts today said the exclusive contract with Apple Inc. to sell the iPhone in the U.S. is still a good deal for AT&T. The reason: AT&T can attract new customers who pay at least $70 a month in subscription fees over the life of a two-year contract.

"Sales of iPhone are incrementally positive for AT&T, no doubt," said Rick Franklin, a financial analyst for Edward Jones, which is based in St. Louis, Mo. "Whether iPhone is a huge game-changer for AT&T, I'm still not so sure."

Franklin said he has not yet tabulated an updated forecast of earnings for AT&T, which reports its second quarter financial data on July 23.

Unnamed analysts in a report in the Globe and Mail today said that sales of the iPhone for 12 days in June eroded nearly three percentage points from AT&T's adjusted operating income margin, a measure of profitability.

The report notes that AT&T expected that margin to be in the low 40% range when the new iPhone 3GS was unveiled last month, roughly in line with the 40.9 % margin reported in the first quarter for operating income before depreciation and amortization.

However, the Globe and Mail report adds that a surge in iPhone sales in late June pulled the company's margin down to 38.5 %.

If that forecast turns out correct, AT&T "would be taking a hit..., and it sounds more dramatic than expected," said Joseph Bonner, an analyst at Argus Research Co. in New York. But "it's not really a bad thing," he said, meaning AT&T can count on the subscribers -- many of them won over from other carriers -- over a long-term.

One way AT&T could be hurt by the iPhone subsidies is if many subscribers suddenly back out of using AT&T after their two-year agreement for the iPhone runs out, Franklin said. "I doubt that's going to happen," he said.

"The short-term impact on earnings is a paradox," Franklin said. "The iPhone should create long-term value for AT&T."

Franklin acknowledged that iPhone's exclusive deal with AT&T is being studied by investors, partly to see how valuable an exclusive deal with a carrier subsidy can be to a carrier. AT&T has said it has a multi-year deal with Apple, but it is not clear when it ends.

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