AT&T Cutting the iPhone Price but Controlling the Distribution

Implications: The rumors about AT&T dropping the price and limiting the distribution of an upgraded Apple iPhone could be tactics to match Verizon in data usage, total ARPU, and postpaid net adds.

Analysis: If the price is decreased on an upgraded iPhone, AT&T has to ensure customers are activated to cover subsidizing the estimated $200 price drop.  The distribution tactic appears to be restricting iPhone sales to only the 1,800 AT&T company-owned stores, and not Apple’s 120 stores and online sites.  Apple reported sales of 3.7 million iPhones for 2007, but contracted carriers showed 2.3 million activations or about 60% of sales.   AT&T controlling the iPhone activations could diminish the role of Synchronoss’s self-activation software by requiring in-store activations.  And Apple’s revenue sharing could be adjusted depending on the point of activation is different from the point of sale.
During AT&T’s first quarter results presentation, CFO Rick Lindner emphasized the strong revenue contribution of iPhone users.  Activated iPhone customers were generating ARPU over $90 compared to the overall base at a $50.18 ARPU.  AT&T has the challenge of matching Verizon’s total ARPU of $51.40.  Verizon’s results are mainly due to the higher data ARPU of $11.94 compared to AT&T’s $10.79.  If the iPhone is cut to a $199 price and upgraded to 3G broadband instead of EDGE,  AT&T can begin catching up to Verizon’s 39 million 3G handsets in their 67.2 million subscriber base.  AT&T only has 11 million 3G devices in their larger 71.4 million customer base. 
Also, during the last two quarters, AT&T has reported about half of their net adds are prepaid and from resellers.  In comparison, Verizon reported that the 1.5 million net adds were 1.3 million contract postpaid and 97% from their own retail channels.  The Sprint Nextel defections are an opportunity to build the postpaid base.  With the next generation iPhone, AT&T appears focused on activating high-value postpaid customers in its own retail stores.