AT&T may have to pay dearly to retain iPhone exclusively

AT&T Inc. would seem to have every reason in the world to want an extension of its exclusive agreement with Apple Inc. to sell the iPhone and run it over AT&T's wireless networks.

For Apple, continuing the exclusive agreement with AT&T seems less advantageous as time goes on, since selling the iPhone through more carriers would increase the number of devices sold.

Plus, AT&T would need to greatly sweeten the terms of its current agreement just to keep Apple in its fold, industry observers said.

AT&T is negotiating with Apple to extend its exclusive deal, which expires next year, into 2011, The Wall Street Journal reported. Neither company will comment publicly on the report.

Five analysts interviewed today were divided over what Apple might do about extending the arrangement, but all agreed that an extension would clearly benefit AT&T.

"AT&T would be crazy not to want to keep the exclusivity as long as they can," independent analyst Jeffrey Kagan said.

The question for AT&T is how much it is willing to pay to be the sole seller of the iPhone. None of the analysts would speculate on what form of payment might be involved, partly because there are so many variables at work. The payment could be as simple as paying Apple more upfront for each phone AT&T sells, or it could be as complex as Apple getting AT&T to agree not to sell any number of specific smartphone models made by Apple's competitors. It will likely be a combination of many things, they said.

"AT&T is probably saying, 'This is a huge win for us; let's expand the terms with Apple.' Otherwise, why would Apple even do it?" said Kevin Burden, an analyst at ABI Research Inc.

"It would not be in Apple's best interest to stay exclusive with AT&T, and in fact, Apple should be getting onto every carrier's network as soon as they can," added Craig Mathias, an analyst at Farpoint Group and a former Computerworld columnist.

All those interviewed said it wouldn't be hard to build in radios that work on other networks, including the EV-DO network from Verizon Wireless.

If, in addition to AT&T, Apple should go to Verizon or T-Mobile USA to sell the iPhone, there is a chance that a price competition would occur, lowering the average sales price and the profit that Apple could make on each device, warned Sean Ryan, an analyst at market research firm IDC.

"If they want to get iPhone devices out there and sell as many as possible with other carriers, do they start sacrificing their profit margin?" Ryan asked. He said that kind of competition would certainly drive down the price.

Burden noted that if AT&T and T-Mobile were to compete in selling the iPhone over their respective GSM networks, there would be pressure on Apple to drop the price. But Burden said Apple is probably more interested in keeping the iPhone's US$199 price from eroding, if only to keep the smartphone category from slipping into a bargain price that could devalue the entire category.

Ryan agreed, saying the bigger concern for Apple is whether it wants to sell more devices or would prefer to sell fewer devices and keep its profit margin somewhat higher. "It depends some on what Wall Street investors think," he added. By extension, if Wall Street believes buyers in a recession might want to pay less, that could favor selling the iPhone with multiple carriers.

There is some value aside from profits on sales in staying with AT&T, Ryan added. Working with AT&T gives Apple the ability to pressure AT&T to provision certain features and applications. "If and when Apple moves to other carriers, they may not be able to get that kind of leverage on features, since they have turned their marketing strategy into a volume sales play," Ryan said.

Now that Apple faces so many smartphone competitors with more to come, including the Palm Pre and future Android phones, selling the iPhone with other carriers might lessen its value simply because the other carriers have respectable alternatives, Ryan said. "Apple might lose some market leverage if it went nonexclusive," he said.

That might sound ironic, but Ryan could be right. If AT&T opens up the penny bank for what it is willing to give Apple, that may be the biggest reason for Apple to stay exclusive with AT&T a little longer.

Copyright © 2009 IDG Communications, Inc.

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