iPhone to cut into AT&T earnings until 2010

By Sinead Carew

NEW YORK (Reuters) - AT&T Inc will suffer lower earnings this year and next year as it plans to subsidize the price of the latest iPhone from Apple Inc in a bet it can help it boost data services and steal customers.

While some analysts applauded the plan, saying it would broaden the market for the high-speed version of the most talked about cell phone in history, others questioned whether AT&T was sacrificing too much for one product.

AT&T, the largest U.S. mobile phone service provider, said iPhone subsidies would cut its earnings per share by 10 cents to 12 cents in 2008 and 2009 and Chief Financial Officer Rick Lindner said the move would put pressure on AT&T's forecast for double-digit earnings growth this year.

AT&T, the exclusive U.S. service provider for the iPhone, said it was subsidizing the latest device to make it affordable. The new iPhone will cost $199, half the previous entry-level price.

Under the new pact, AT&T will not give Apple part of its monthly service fees, unlike their first iPhone agreement.

But investors focused on the hit to earnings and pushed AT&T's shares down 1.7 percent. Crowell, Weedon & Co analyst Douglas Christopher said AT&T's profit should not have to suffer for an agreement to sell a hot new phone.

"I think that in this type of market asking shareholders to deal with more dilution for the sake of iPhone is a lot," said Christopher, who has a buy rating on AT&T shares.

Gartner analyst Kenneth Dulaney said the plan to stop paying a portion of revenue to Apple made the hit to earnings all the more surprising. "This says that the product is so hot the carriers have lost all their power to negotiate," he said.