Close

Apple’s iPhone 3G saves AT&T from recession

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Apple's iPhone 3G saves AT&T from recession

If it wasn’t for Apple’s iPhone, AT&T would have had tough time this past holiday quarter. AT&T’s landline business suffered as more and more customers are switching to wireless. Thanks to 1.9 million new iPhone 3G activations in the quarter, however, AT&T’s wireless business grew. The iPhone is also stimulating AT&T growth at the expense of its rivals as most new wireless subscribers switched networks just to get the iPhone 3G. In fact, if it wasn’t for subsidies and 3G network upgrades, AT&T’s net income would’ve also risen. AT&T’s quarterly figures reveal several interesting facts. Let’s see what they are.

Chicago (IL) – If it wasn’t for Apple’s iPhone, AT&T would have had tough time this past holiday quarter. AT&T’s landline business suffered as more and more customers are switching to wireless. Thanks to 1.9 million new iPhone 3G activations in the quarter, however, AT&T’s wireless business grew. The iPhone is also stimulating AT&T growth at the expense of its rivals as most new wireless subscribers switched networks just to get the iPhone 3G. In fact, if it wasn’t for subsidies and 3G network upgrades, AT&T’s net income would’ve also risen. AT&T’s quarterly figures reveal several interesting facts. Let’s see what they are.

 

AT&T posted its fiscal 2008 fourth quarter earnings Wednesday (for period ending December 31). The numbers show a high correlation between Apple’s handset and AT&T’s fortunes. If it wasn’t for Apple’s iPhone, the telecom giant would have dropped the ball as landline business revenues dropped dramatically: AT&T lost 1.56 million landline lines in the quarter, and a total of 6 million for all of 2008. Broadband services also dipped as 236,00 new subscribers were added in the quarter, down from 396,000 new additions a year ago. Only its TV service U-verse grew substantially more than doubling, adding 264,000 new subscribers, up from 105,000 in the same quarter a year ago.

Its wireless business made up for the landline decline. AT&T added 2.1 million new wireless subscribers in the quarter, which is down from 2.7 million a year ago. The growth slowed due primarily to a matured market as most now have at least one cellphone with a service plan. It’s remarkable that 90% of new subscribers came to AT&T thanks to iPhone 3G and its service lock.

AT&T activated 1.9 million iPhone 3G units in the quarter, down 21% from 2.4 million activations in the previous quarter when Apple and AT&T launched iPhone 3G to a peak demand. Nearly 760,000 iPhone activations in the quarter came from people switching over from rival networks.

AT&T CEO Randall Stephenson has only kind words to say for Apple’s handset: “The success of our iPhone 3G launch has driven wireless growth and helped redefine the wireless data space.” The higher-margin iPhone subscribers also helped drive mobile data traffic – and since it’s more lucrative, AT&T’s revenue per subscriber increased from $57.35 a year ago to $59.59 in the holiday quarter.

Mixed landline and wireless performance, combined with layoff expenses, 3G network upgrades and subsidies led to a slight 2.4% increase in quarterly revenue, and a more substantial 23% drop in quarterly net income.

Quarterly revenue was $31.1 billion, up 2.4% from $30.4 billion a year ago. Annual 2008 revenue climbed 4.3% to $124 billion. Net income for the quarter was $2.4 billion, or 41 cents a share, down 23% from 3.1 billion, or 51 cents a share, a year earlier. Annual earnings in 2008 were $12.9 billion, or $2.16 a share, up from $11.95 billion, or $1.94 a share, for 2007. Excluding one-time charges, AT&T profited 64 cents a share in the quarter, nearly matching Street’s 65 cents a shareconsensus.

The 23% drop in net income is attributed both to a $450 million investment for 3G network upgrades in 2008, as well as subsidies that came into play with the changed business model of iPhone 3G. It is estimated that AT&T pays Apple around $400 for each handset. The carrier then gradually recovers this money during the lifetime of an obligatory 2-year service contract. Subsidies make the iPhone 3G’s $199 price possible, but AT&T takes an upfront hit which negatively impacts earnings in the short-term.

IPHONE 3G: THE STAR OF AT&T’S HOLIDAY QUARTER As AT&T’s landline and broadband businesses experience decline in a tough economy and a saturated market with lack of consumer interest, Apple’s iPhone 3G saved AT&T’s holiday quarter. The handset accounted for nearly 90% of all new subscribers. Of the 1.9 million iPhone 3G activations AT&T reported in the quarter, over 40% (or 760,000) switched from rival networks.
 
Continued on next page: Nice-to-knows from AT&T’s earnings report, Notes for number-obsessed readers…
 

Nice-to-knows

Drilling deep into AT&T’s earnings reveals some “nice-to-knows.” For example, comparing AT&T’s iPhone 3G numbers for the second half of 2008 directly alongside Apple’s yields some interesting facts about the performance of iPhone 3G thus far. Here’s a summary of what we found by crunching the numbers.
 

  • Of 2.1 million new wireless subscribers added in the quarter a whopping 1.9 million, or 90%, were iPhone 3G customers.
  • Since its launch, AT&T activated 4.3 million iPhone 3Gs in 2008, over double the number of first-generation iPhones activated in 2007.
  • Average revenue from iPhone customers is 60% higher than that of non-iPhone AT&T wireless subscribers.
  • iPhone 3G contributed mostly to AT&T’s 13.2% anunual wireless growth in revenue.
  • Wireless business accounted to 41.4% of total revenue for the quarter, up from 37.4% a year ago.
  • iPhone contracts provide 60% higher than average service revenue thanks to an obligatory $30 a month unlimited 3G data plan, a $10 premium over $20 a month EDGE data plan sold with the first-gen iPhone.
  • iPhone users continue to dominate mobile web, pushing AT&T’s wireless data use growth to 51.2% annually.
  • Nearly 40% iPhone 3G activations for the quarter, the same percentage as in previous quarter, were for customers switching from a different provider. The percentage ammounts to 760,000 new subscribers for the quarter, 960,000 in the previous quarter, meaning that iPhone 3G draw around 1.8 million subscribers from rival networks since it laucnhed.
  • iPhone users rarely drop their AT&T service, unlike rest of the carrier’s customers, especially postpaid subscribers. Lower churn rate equals to significantly lower marketing costs.
  • Of almost 12 million iPhone 3G units that Apple shipped worldwide by the end of 2008 (6.9 million units in fiscal 2008 fourth quarter and 4.3 million units in fiscal 2009 first quarter), AT&T activated 4.3 million units, meaning that international sales accounted to well over 60% of all iPhone 3G units sold in 2008 worldwide.
  • Compared with RIM’s BlackBerry Storm sold exclusively by Verizon, the iPhone 3G outsold Storm in the quarter four to one and five to one if we compare respective devices’ first quarter on the market. Verizon’s holiday quarter report does not divulge Storm sales, although the Wall Street Journal cites anonymous sources “familiar with the matter” who claim that Verizon shipped 500,000 Storm units in the first month following the November 21 launch.
  • RIM’s co-chief executive officer Jim Balsillie said that the desire to rush the phone to market before holiday led to buggy software and negative reviews but promised a software patch to fix these issues. Balsillie dubbed such problems as the “new reality” for smartphones.

IMPORTANT NOTES FOR OUR NUMBER-OBSESSED READERS

For the sake of argument, please note that this comparison between iPhone 3G figures reported by Apple and AT&T is not 100% accurate simply because Apple’s fiscal quarters differ from calendar quarters, unlike with AT&T whose fiscal quarters match calendar ones. More precisely, AT&T’s third and fourth fiscal 2008 quarters fell between July 1 – September 30 (92 days for the period) and October 1 – December 31 respectively (92 days for the period), matching calendar 2008 quarters, spanning 184 days in total.

At the same time, Apple’s fourth fiscal 2008 and first fiscal 2009 quarters differ slightly from the third and fourth calendar 2008 quarters and ran between June 29 – September 27 (91 days for the period) and September 28 – December 27 respectively (91 days for the period), or 182 days in total. Note the two days difference between duration of Apple’s and AT&T’s two comparable quarters in the second half of last year.

On top of that, the difference between ends of quarters makes accurate comparisons skew slightly. Since Apple’s fiscal 2008 fourth quarter ended September 27, three days earlier than AT&T’s fiscal 2008 third quarter (ended September 30), some of the iPhone 3G activations that AT&T reported for its quarter actually fell in Apple’s following quarter, more specifically the ones that occurred between September 28 and September 30. Similarly to this, Apple’s fiscal 2009 first quarter does not account for the last four days of December 2008 that were in fact included in AT&T’s fiscal 2008 fourth quarter.

Although aforementioned slight discrepancy between respective companies’ quarters is measured in days and should not skew results significantly, it is worth mentioning.

LOWEST CHURN RATE, HIGHEST ATTRACTION RATE
Apple’s iPhone has the lowest churn rate (perecentage of subscribers who drop their service), which yields lower marketing costs. It is still the only phone with the “oomph” to convince customers to switch from a rival network just to get it. A steady 40% of all iPhone 3G activations past year were for customers switching from a rival network.