AT&T Catching Up to Verizon in 3G Handsets with Handset Subsidies

Implications: AT&T’s future results might be impacted by comments in the 2Q2008 presentation that the iPhone subsidy could reach $720 million and that 13 million or 18% of total subscribers had 3G devices.

Analysis:

For the second quarter results, AT&T emphasized the growth of 3G-capable handsets in its subscriber  base to 13 million from 11 million in the previous quarter.  The challenge for AT&T with its 72.9 million subscribers is catching up to Verizon that reported 40.5 million 3G-capable handsets or 59% of its 68.7 million base.  Without greater 3G handset capability across the subscriber base, AT&T cannot continue the pace of 52% data ARPU growth for the second quarter over the prior year’s same quarter.

During the quarterly results presentation a couple weeks ago, AT&T had also warned that the new 3G iPhone subsidy could cost up to $720 million.  Later in an interview with USA Today, AT&T’s CEO tried to justify the $300 subsidy cost of the 3G iPhone.  He pointed out how the iPhone enabled AT&T to pursue the “cool factor”, assert strong branding and build global leadership.  Perhaps to divert from the problems of landline and DSL losses, the CEO emphasized that “We’re all about wireless” and the transformation to “mobilization”. 

Besides the iPhone subsidy, what will it cost to subsidize other devices to close the gap between AT&T’s 13 million and Verizon’s almost 41 million 3G-capable handsets?  To upgrade 25 million handsets at subsidies of $100 to $300 would cost AT&T between $2.5 and $7.5 billion.  And to earn the payback in data ARPU, AT&T would probably have to increase the network CAPEX for better broadband coverage than the criticism expressed by some 3G iPhone customers.  AT&T’s iPhone advertisement pitches the message of “Twice as Fast. Half the Price. On the nation’s fastest 3G network.”  On the other hand, Verizon’s advertising theme includes “America’s largest 3G network”.  Also, the price war of handset prices and subsidies could be starting with Verizon’s back-to-school advertising message of “Lowest prices ever!…Our best 3G phones.”  AT&T’s next several quarterly results will show how handset subsidies and 3G coverage accelerates data revenues.