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.

IPHONE ADVANTAGE

AT&T said the new iPhone initiative would start adding to earnings in 2010. It did not detail the subsidy arrangement nor how much in service fees Apple was forsaking under the pact.

Executives of AT&T, which competes against Verizon Wireless and Sprint Nextel Corp, said iPhone would help it win customers who can afford to pay monthly fees for wireless data services, such as businesses giving employees e-mail on-the-go.

"We expect this will spur demand, boost adoption of data services, and attract high-value customers," AT&T CFO Lindner told analysts on a conference call.

Some analysts said the move should boost average revenue per subscriber and help AT&T win customers from its biggest rival, Verizon Wireless, which is aiming to overtake AT&T as No. 1 later this year by buying rural provider Alltel.

"The initial hit is not good but they don't have that ongoing license fee," said Joseph Bonner, an analyst at Argus Research. "Long term it might actually wash out. The point is to acquire the subscriber and keep them."

AT&T said the new phones would go on sale beginning July 11 to customers who sign up for a two-year contract.