Thanks to iPhone, Wireless Biz Bolsters AT&T

Segment Up 24% as Overall Profit Drops Almost 10%

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NEW YORK (AdAge.com) -- AT&T is riding out the recession better than expected, thanks in large part to the iPhone.

AT&T sold about 300,000 more iPhones in the last quarter of 2008 than in the first quarter of this year, due to holiday and other seasonal factors.
AT&T sold about 300,000 more iPhones in the last quarter of 2008 than in the first quarter of this year, due to holiday and other seasonal factors.
The telecom giant, the country's No. 2 wireless carrier, saw its profit slip nearly 10% from a year ago on the back of a declining landline voice business and pension-related expenses. But the iPhone fueled its wireless division's profit, which grew 24% from the last quarter.

AT&T reported a quarterly net income of $3.1 billion, down from $3.5 billion a year ago.

AT&T, the only wireless operator to carry the iPhone, sold 1.6 million of the devices between January and March, bringing total iPhone activations on its network to 6 million. The carrier sold about 300,000 more iPhones in the last quarter of 2008 than in the first quarter of this year, due to holiday and other seasonal factors.

The iPhone again showed it was AT&T's big draw: 40% of its first-quarter iPhone activations were new to the network, a rate in line with past quarters. And the iPhone users generate 1.6 times more revenue for AT&T than its other postpaid users and are more loyal, the company said.

Starting to come out ahead
Though investors were initially wary of how much AT&T was paying Apple for the phone -- estimated to be about $375 per phone -- they are now seeing the investment bear fruit. In earlier quarters, the payout to Apple was depressing margins, but now that users are locked into long-term contracts, AT&T is starting to come out ahead on the back end. The operating margin of its wireless segment this quarter is above 35%, about 10 percentage points higher than in the previous quarter.

One question dogging AT&T is whether it can hold onto its deal with Apple to be the only U.S. carrier selling the iPhone. The Wall Street Journal reported last week that AT&T is talking with Apple to extend the agreement into 2011. Some analysts say AT&T would be fine without the exclusivity, with new phones from Nokia and BlackBerry to keep it going. Plus, the iPhone has already lifted AT&T's brand image, with the 3G iPhone launch coinciding with the rollout of the carrier's new nationwide 3G network.

"It's helped them to showcase that they're cutting-edge. They were kind of the stodgy network," said Frost & Sullivan analyst James Brehm. "If they don't get the exclusive, it won't impact them that much because they will still offer it. They have seen good traction with other devices."

More than just a phone
Apple, which controls the advertising for the iPhone, has been pushing the message that it's more than just a phone, given the more than 25,000 applications available to its users. Its ad series with the line "There's an app for that" shows how the iPhone can manage life's little quandaries, from identifying a song on the radio to finding an apartment.

AT&T is also riding the wave of consumer demand for computing on the go. Its postpaid wireless subscribers with integrated devices such as smartphones and netbooks more than doubled over the past year, and those devices accounted for 60% of its total wireless-device sales.

With a net 1.2 million wireless-customer additions last quarter, AT&T has more than 78 million subscribers, closing in on Verizon, which has more than 80 million. Its turnover rate was flat from last quarter, at 1.2%.

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