Word came out yesterday that AT&T didn't have a great quarter (which ironically sent the stock price soaring because it wasn't as bad as expected). This loss seemed perplexing to me given that Apple reported its numbers earlier this week (as I wrote in Lauren's Wrong: People Definitely Want Macs), and Apple reported selling more than 5 million iPhones in the quarter. With AT&T as the exclusive distributor of iPhones in the US and the beneficiaries of at least part of those huge numbers, you would think they would have had themselves a nice little quarter too, riding along on Apple's coat tails, but they didn't in real terms.
The reason is that AT&T has to subsidize each one of those iPhones that they sell losing hundreds of dollars per phone, but don't cry for AT&T just yet because what they lose on the front end, they make up on the back end.
Those Pesky Data Fees
For the privilege of owning one of these iPhones, AT&T has you sign a 2 year contract with a hefty monthly data fee of $30.00. By the way, if you want unlimited texting it's another $20 ($30 for the whole family and if you have a teen worth every penny - trust me) and of course, there is the phone plan itself which costs at a minimum $39.99. So it takes some time for AT&T to get its money back, but after a few months in most cases, they are generating pure profit.
As Renee Ritchie reports in the iPhone Blog, those data fees added up to hefty $3.4b in data revenues for the quarter. Yet even with that and selling and activating 2.4 million iPhones in the quarter, AT&T still managed to record a 15 percent year over year loss because they had to eat a bunch of money on those iPhone sales. Tough to swallow? Perhaps in the short-term, but in the big picture, AT&T knows that very soon the money spigot will be wide open and they will make that money back and then some.
Fine Line Between Love and Hate
There have to be some interesting conversations these days in the executive suite at AT&T regarding Apple. On one hand, the company is making money hand over fist in data fees, but on the other they are giving it up with their generous phone subsidies (which to be fair, they do on most phones, but most phones don't retail for over $500 bucks). When the exclusive agreement AT&T has enjoyed over the last couple of years ends soon, you have to wonder what AT&T wants to do.
Selling iPhones of course puts them on the map. People have shown they want these phones. There aren't too many other phones that will get people to line up outside your retail store days in advance. Carrying the iPhone gives AT&T some credibility with consumers, something you just can't get with ordinary phones. Yet it costs them so much to sell them (at least initially).
How Will it Play Out?
In the end, it will be interesting to see if Apple spreads the love and provides iPhones to other carriers. RIM sells Blackberries at multiple carriers so why shouldn't Apple do the same. I know people who are Verizon customers who would jump at the chance to own an iPhone if they could.
At this point, it's not easy being AT&T. They have some tough decisions to make and some hard negotiations to go through, but if they're smart they'll find a way to keep selling that iPhone. It may cost them up front, but boy does it pay dividends down the road.