IPhone seen boosting AT&T, hurting Sprint

NEW YORK (Reuters) - Apple Inc.'s (AAPL.O) iPhone may be too expensive for most Americans, but the much-hyped device is expected to help AT&T Inc. (T.N) win quality customers and drive shoppers into its stores.

At $500, the iPhone will not convince the average shopper to buy it when sales begin on June 29, surveys show. But those with that kind of cash to spare could prove to be most valuable to the iPhone's exclusive U.S. carrier, AT&T, analysts said.

Wealthier individuals tend to pay monthly bills and are called post-paid subscribers. They are valued over customers who use prepay phone cards and tend to defect to other providers more easily.

"While there's a limited market for the price point of the iPhone it does represent the most valuable subscribers in the industry," said Stanford Group analyst Michael Nelson.

AT&T has an exclusive deal in the United States with Apple for at least two years, so anyone on another wireless network has to switch to AT&T to use the gadget.

Sprint Nextel Corp. (S.N) will likely be most hurt by the iPhone -- a touch-screen hybrid of the popular iPod digital music player and a smart phone -- as Sprint tends to attract customers who use video and music features, analysts said.

"I think it's going to be a little bit more difficult for Sprint because their customers will have a natural affinity for the product," UBS analyst John Hodulik said.

A study conducted by research firm M:Metrics issued on Friday found that two-thirds of people most likely to buy an iPhone currently subscribe to a different carrier's service.

"This is an early indication that AT&T's strategy to use the device to lure customers from competitors could pay off," said Mark Donovan, a senior analyst at M:Metrics.

Wide consumer interest in the new gadget will encourage more people to visit AT&T stores and potentially buy less expensive phones.

"It's not only going to help in the high-end market. It's going to help in the low-end market," said Hodulik. "These guys will sell a lot of Apple phones but they'll leverage the traffic in their store to sell a lot of non-Apple phones."

OVERWHELMED?

There is a risk the anticipated throng of customers could overwhelm AT&T staff and weaken customer service, ultimately driving people away, Credit Suisse analyst Christopher Larsen said in a note to clients.

But a successful launch may lift AT&T's enterprise value -- which is market capitalization plus net debt -- by 3.6 percent to 6.8 percent, or $11 billion to $21 billion, assuming that it sells 9 million iPhones by the end of 2008, said Larsen. Other analysts were skeptical sales would reach that level.

Larson also said an iPhone customer would likely spend an extra $20 per month on data service charges compared to the average AT&T subscriber.

Despite the buzz around the iPhone, which has a big screen for Web surfing and video, it will likely account for only a small portion of handset sales as 85 percent of U.S. consumers spend $100 or less on phones, according to the Yankee Group.

Yankee analyst John Jackson pointed out that only 20 to 25 percent of U.S. mobile customers are not bound by contracts at any given time, and it can cost $200 to break a contract.

Nevertheless, analysts expect competing carriers to offer larger subsidies on their phones to encourage consumers to sign up for longer contracts and to keep them from defecting.

"I would expect Sprint in particular to respond by increasing subsidies to take share on the postpaid side and I expect increased subsidy and acquisition costs on the whole for the industry," Stanford's Nelson said, adding that Deutsche Telekom's (DTEGn.DE) T-Mobile USA could come under pressure.

AT&T has recently been losing postpaid market share to rivals such as Verizon Wireless, a venture of Verizon Communications Inc. (VZ.N) and Vodafone (VOD.L).

UBS's Hodulik sees the iPhone helping boost AT&T's share of the postpaid market toward 30 percent by year end, from an estimated 25.8 percent in the first quarter, 27.1 percent in the 2006 fourth quarter and 27.7 percent in the third quarter.

While Verizon Wireless may find it easier to defend its turf, Hodulik expects the No. 2 U.S. mobile service to subsidize a number of new handsets later this year to protect its roughly 30 percent share of the postpaid market.

AT&T's rivals have publicly dismissed the threat of the iPhone by predicting excitement over the new gadget to rub off on sales of other advanced phones and data services.

But Pacific Crest Securities analyst Steve Clement was skeptical: "I don't see a scenario how (iPhone) would help competitors."

(Additional reporting by Ritsuko Ando and Franklin Paul)