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AT&T profits slip on iPhone investments

Landlines = buggy whips

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AT&T announced its second quarter financial results today, revealing numbers that make it increasingly clear that Big Phone is betting the farm on the Apple iPhone.

And considering how quickly its landline business is deteriorating, moving fast and hard into the expanding smartphone market looks like a good business decision - albeit one that requires investment today for revenues tomorrow.

Overall, AT&T's net income for the quarter that ended on June 30th dropped 14.8 per cent from the same quarter in 2009, from $3.84bn to $3.28bn. Landline-income weakness was the main contributor to that dive, having sunk 36 per cent during the same period, from $3.14bn to $2.01bn.

Wireless income, however, pointed in the opposite direction, posting a 2.7 per cent increase from $3.07bn to $3.28bn - and that's where things get interesting.

The increase in overall wireless revenue was far greater than the rise in income: 10.1 per cent, from $12.03bn to $13.25bn. The reason for the disparity was the success of the iPhone.

While success being a depressant to income may seem counterintuitive, remember that AT&T is subsidizing each and every one of the 2.4 million iPhones it activated during the quarter. As the company said in a statement, "Increased operating expenses in the second quarter of 2009, in part, reflect volume-based acquisition costs associated with the success of the iPhone 3GS launch."

However, those "volume-based acquisition costs" are an investment that will enrich AT&T's voice and data service fees for the duration of those new iPhone owners' two-year contracts.

And those data revenues are up - way up. Wireless data revenue grew by 37.2 per cent during the quarter to $3.4 billion, which was more than twice that of the same quarter two years ago.

Plus, the amusing-to-pronounce but all-important ARPU (average monthly revenue per user - or, in AT&T parlance, subscriber) also rose, up 2.3 per cent to $60.21. AT&T's statement also proudly pointed out that the second quarter of 2009 was the company's sixth consecutive quarter that saw a year-on-year ARPU increase - not surprising, but welcome to AT&T investors.

Investors should also be pleased that more than a third of those 2.4 million new iPhones were purchased by customers new to AT&T - and they're now locked into AT&T services for two years.

It's no surprise, then, that AT&T is reportedly in negotiations with Apple to extend their iPhone-exclusivity deal. And it's equally unsurprising that Big Phone is fighting a US Congressional investigation into whether such deals are good for consumers. ®

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