The downside of AT&T's iPhone 3G subsidies

When AT&T made the decision earlier this year to subsidize the iPhone 3G and get the price down to a figure that would generate mass market appeal, Ralph de la Vega, AT&T Mobility's CEO, said that he expected a short-term hit to the company's margins. But de la Vega and the folks at AT&T didn't anticipate selling 2.4 million iPhone 3G devices during the third-quarter. That overwhelming sales figure boosted the company's net adds to 2 million, but caused its overall operating margins to fall to 33.8 percent down from 35.3 percent a year ago. AT&T said it spent $900 million in customer-acquisition costs related to the iPhone.

Investors never like to see a margin decline nor do they like to see customer acquisition costs rise. But that is the reality of AT&T's decision to subsidize the iPhone 3G. Nevertheless, the company remains confident that this margin hit is only short-term and will pay off in the form of better, higher paying customers. In yesterday's earnings call with investors, de la Vega said that the iPhone 3G customers generate better-than-average revenue per user--about 1.6 times that of the average for its postpaid base, or about $95 per month. 

He also said that AT&T continues to attract new customers to its network because of the iPhone--an astonishing 40 percent of the iPhone 3G activations are from customers that are new to AT&T. That figure has to be causing some consternation among AT&T competitors and I have to wonder if we will see an increase in third quarter churn rates among some of the other operators as their customers defected to AT&T for the iPhone 3G.

It will be interesting to see how long it takes AT&T to recoup its iPhone 3G acquisition costs. Ultimately that will determine the success of AT&T's subsidy strategy. 

By the way, AT&T's Ralph de la Vega was one of the the top 5 picks in our 25 Most Powerful People in Wireless list that we revealed last week. I'd like to thank all the readers who sent me their comments, criticisms and praise of our list. Many of you said that you were disappointed that our list was so U.S. centric.  I apologize for not making it clear when we launched the list that we were looking at it from a U.S. angle--since that is the wireless market that we follow most closely. 

We are in the midst of preparing our next feature--the Top Wireless Innovators of All Time. These are the folks who made the wireless industry what it is today. If you have any suggestions, send me a note and tell me why you think this person should be considered a top wireless innovator.  -Sue