Analysis: AT&T faces tough year after losing iPhone exclusive

NEW YORK Mon Jan 10, 2011 7:23pm EST

The AT&T logo is seen at their store in Times Square in New York April 21, 2010. REUTERS/Shannon Stapleton

The AT&T logo is seen at their store in Times Square in New York April 21, 2010.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - Only 10 days into 2011 and it is already shaping up to be AT&T's toughest year since its 2004 formation as it is set to lose the exclusive U.S. rights to sell Apple Inc's iPhone.

Despite AT&T's promise to launch 20 new advanced phones, all eyes are on its arch rival: Verizon Wireless, the top U.S. mobile service, is expected to announce on Tuesday a plan to start selling a version of the iPhone in the next few weeks.

Investors in AT&T, the No. 2 U.S. mobile service, dumped the stock on Monday, pushing it down 1.8 percent ahead of Verizon Wireless' expected announcement, which would end AT&T's 3-plus years of strong growth driven by iPhone sales.

"I think AT&T is going to get demolished," said Gleacher & Co analyst Brian Marshall, who covers Apple.

Many analysts expect AT&T to lose contract customers this quarter without a powerful, unique incentive to lure subscribers. The operator also suffers from a perception that its wireless network is ill-equipped to handle iPhone users' heavy data usage.

A quarterly subscriber loss would be AT&T's first since it was formed in 2004 through the merger of AT&T Wireless into Cingular Wireless. It could lose up to 3.5 million customers this year by some measures.

AT&T also will face additional pressures from Verizon Wireless, which is set to offer new iPhone customers the same privileges all of its smartphone customers enjoy: unlimited wireless data usage for a flat monthly fee.

AT&T upset some customers by stopping sales of unlimited wireless data plans in 2010.

To be sure, defections will be tempered by AT&T's large base of customers on multi-year contracts or family plans. Termination penalties make it costly for customers to leave early.

About 80 percent of AT&T's smartphone users are on family plans, the company said. An estimated 15 million new iPhone customers AT&T added in 2010 would not be able to leave for Verizon Wireless without great expense, said Barclays analyst James Ratcliffe.

But many investors are nonetheless expecting a sales shortfall at AT&T, which has about 22 million iPhone users, according analyst estimates.

"There's been 3 years where Verizon's customer base has had iPhone envy. They're going to want to get it as soon as they can," Hudson Square analyst Todd Rethemeier said.

Rethemeier, on the pessimistic end of the scale, expected AT&T to post a significant 3.5 million net loss of contract customers in 2011, leaving it with 64.9 million of these high-value bill paying customers.

Pacific Crest analyst Steve Clement expected AT&T to lose customers over the first two quarters of the year and end 2011 with no net new subscribers.

An AT&T spokesman said the fears have been overplayed, pointing out that it managed to add 5.2 million iPhone customers in the third quarter despite widespread speculation that a Verizon iPhone was coming soon.

Meanwhile, Verizon Wireless could report as many as 2.5 million net new customers this year, Clement estimated. He added that the iPhone accounted for about 40 percent of AT&T's gross additions in the third quarter, which exclude customer churn -- an industry term for customer cancellations.

Even Ratcliffe of Barclays, among the more optimistic analysts covering the stock, expects 2011 to be a very tough year for AT&T.

"On the margin things are definitely more competitive for them," said Ratcliffe who still expects AT&T to add 1.4 million contract customers in 2011, despite the new iPhone.

While AT&T has the most to lose, other rivals including Sprint Nextel and T-Mobile USA, a unit of Deutsche Telekom, will also suffer, analysts said.

Several analysts also noted that AT&T has not been standing still, as it promised at the Consumer Electronics Show last week to launch as many as 20 new phone models with high-speed Web connections this year. AT&T also halved its price for 3GS, an older iPhone model, last week.

On the New York Stock Exchange. Verizon ended a penny lower at $35.92, AT&T fell 1.8 percent to $28.34, and Sprint finished down 2 percent at $4.58. Apple shares closed up nearly 2 percent, after reaching a new all-time high, at $342.46 on Nasdaq.

Verizon Wireless is a joint venture of Verizon Communications and Vodafone Group Plc.

(Reporting by Sinead Carew; Additional reporting by Gabriel Madway in San Francisco; Editing by Richard Chang)

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