NEW YORK (Reuters) - AT&T Inc said on Monday it expects to take an earnings hit this year and next year from its decision to subsidize the latest iPhone from Apple Inc as it aims to boost mass-market sales.
The largest U.S. mobile phone service provider forecast the iPhone subsidies to dilute AT&T’s earnings per share by 10 cents to 12 cents in 2008 and 2009. 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 shares fell 1.7 percent on the news, though analysts said the move would help boost demand for the new high-speed wireless phones and improve average revenue per user for the phone company over the longer term.
“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.”
As part of its agreement to shoulder part of the price of the iPhone in order to sell it for a low as $199, AT&T said it would stop paying Apple a portion of its monthly service revenue for iPhone customers.
AT&T said it expected the new iPhone initiative to start contributing to earnings in 2010. The service provider did not detail the subsidy arrangement it had with Apple.
AT&T, the exclusive U.S. service provider for the iPhone, said it would go on sale beginning July 11 to customers who sign on for a two-year contract.
There would be penalties for users who do not activate the iPhone in the first 30 days, AT&T said, in a move aimed at reducing the number of customers who buy an iPhone and tweak the software so they can use it on another network.
A $199 version of the new iPhone will have 8 gigabytes of storage and a $299 model will have 16 gigabytes. The company said the subsidy would increase sales volumes.
“If you loved the first iPhone you’re going to be blown away by this version,” said Ralph de la Vega, the head of AT&T’s wireless business. “We’re very confident the new 3G iPhone ... will drive significant demand.”
AT&T said it was increasing its data service charge for subscribers with the new iPhone to $30 a month from $20 for the existing iPhone. Business customers will have to pay $45 a month for data services.
This is on top of voice service charges. The cheapest AT&T voice plan is $39.99 a month.
AT&T forecast a 2008 adjusted consolidated operating income margin of 24 percent and forecast a full-year wireless operating profit margin of 39 percent to 40 percent.
Shares of AT&T fell 65 cents to close at $37.56 on the New York Stock Exchange. Apple shares fell 2.2 percent to $181.61.
Editing by Richard Chang and Braden Reddall
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