Apple iPhone deal drags down AT&T

While the other telephone companies initially thought it unfair that AT&T managed to score the exclusive deal to flog Apple’s iPhone, they might be laughing now.

When the Apple juggernaut started to roll,  it was on the back of an exclusive deal with AT&T which would see the outfit subsidise Jobs’ Mob in return for the sole rights to sell the shiny toy in the US.

Needless to say, the phone sold very well and the other telcos wished they had such a deal. However, it is starting to look like AT&T’s deal with Jobs had a Faustian tinge to it and is starting to drag the outfit down to hell.

AT&T  announced a $6.7 billion quarterly loss this month. This is partly because of the failed T-Mobile USA merger but is also because it is having to give huge amounts of money to Apple. It cost T-Mobile $5 billion to walk away from the T-Mobile merger, but logic says that the deal with Apple should have been making it zillions.

However, the business model is proving flaky. While iPhones can help subscriber numbers and revenue, they also shrink earnings as operators like AT&T and Verizon Wireless have to pay a fortune to Jobs’ Mob to attract customers to two year contracts.

AT&T’s wireless service margin fell to 28.7 percent, based on earnings before interest, tax, depreciation and amortisation, from 43.7 percent in the third quarter and 37.6 percent a year earlier.

Stifel Nicolaus analyst Chris King told Reuters that AT&T’s margins were rubbish and other analysts say that the race to sign on smartphone customers was proving a massive drag on margins. To make matters worse, the cost to capture and retain customers will increase as competition increases.

One of AT&T’s problem was that attracting more smartphone customers put pressure on its network, which had to be upgraded. All-in-all, it is proving a nightmare.