It's hard to believe that AT&T was once the largest, most powerful telephone company in the world. Now it's basically a glorified wireless carrier whose future depends on a precious, niche customer base.
Not that it's a bad business. Last quarter AT&T posted a 5.5 percent increase in third-quarter profit, and that was largely because of its wireless business -- more specifically, because of iPhone sales. "AT&T's relationship with Apple is paying off," noted the New York Times. "Wireless once again saved the day for AT&T," said CNET.
But at the same time, the Apple deal isn't profitable for AT&T -- the company pays up the tooth (about $375 per iPhone) for the exclusive right to serve those customers in hopes that it can keep them after the deal expires. And in the meantime, AT&T's landline business is evaporating; its broadband business is stalling, and the digital television market has proven incredibly challenging.
The company added 148,000 new DSL subscribers in the third quarter -- a vast improvement over the second quarter -- but that still represents a 70 percent decline from last year, notes Craig Moffett, a Bernstein Research analyst.
"The 'available market' for DSL is shrinking rapidly. It is no surprise, then, that net additions are shrinking with it," wrote Moffett in a note to investors.
Given that American consumers are cancelling landlines at a rapid rate -- AT&T lost close to one million landline customers last quarter -- and given that DSL growth is expected to hit the skids due to the economy, that leaves AT&T with one real growth business: wireless. What would the company look like without the Apple deal? Probably not very pretty. The company recorded 2.4 million iPhone activations during the third quarter -- 40 percent came from competitive wireless carriers -- and added 1.7 million new wireless subscribers, which suggests most of AT&T's wireless growth is driven by Apple.
And what happens when the deal with Apple expires in 2010? Assuming Apple would want to extend the agreement, AT&T won't have any chips at the negotiating table. If the company is getting nailed by the current terms, who knows how bad they'll have it in two years' time. And if the deal isn't extended, then AT&T could lose its most significant growth engine.
But for all the ugly data points, some Wall Street analysts are still unconcerned.
"People are freaked out about AT&T's [landline] losses. They shouldn't be," says Patrick Comack, an analyst with Zachary Investment Research. "It's just the nature of the beast. The iPhone is a differentiator in the market, but it's not everything to [AT&T]. If they didn't have the iPhone deal, they would have worked out something else -- maybe they would have worked with Google."
See Also:
