AT&T said it racked up 2.4 million new iPhone activations in the second quarter, with the bulk of the additions coming from the wireless carrier’s launch of Apple’s iPhone 3GS on June 19. 

The first day of the iPhone 3GS launch was “the best sales day ever” for AT&T’s retail and online stores, noted Chief Financial Officer Richard Lindner. Moreover, 35 percent of all iPhone buyers in the quarter “were customers new to AT&T,” he said. 

iPhone Trade-Offs
Still, surging iPhone demand isn’t without its downside, given that AT&T is heavily subsidizing initial device sales. The company said its wireless service margin fell nearly three percentage points year-over-year to 38.3 percent in the quarter. Without the increased acquisition costs associated with the iPhone 3GS launch, AT&T estimates that its service margin would have been more than 40 percent. 

Nevertheless, AT&T is more than willing to trade off short-term margin gains in exchange for a long-term boost in the average revenue per user (ARPU) that it receives from each iPhone customer over time.

“As we start to benefit from recurring ARPUs from this customer base, the margins will grow,” Lindner said. “But it is difficult to predict” what the ARPU will be in “the next quarter or two given that we have been surprised by the strength of demand.” 

Some industry observers worry that AT&T’s wireless fortunes are too heavily tied to its iPhone exclusivity agreement with Apple and wonder what would happen should the deal come to an end. But Lindner pointed out that AT&T’s smartphone growth isn’t limited to iPhone sales. 

AT&T recorded a 3.5 million increase in the number of 3G handsets with QWERTY or virtual keyboards running on its network in the June-ended quarter, Lindner observed. This resulted in a 37.2 percent increase in wireless data revenues to .4 billion, he said. 

Nine Million iPhones

Lindner encouraged investors to look at the large number of customers with integrated devices that AT&T has overall, of which 60 percent or more are part of “family plans that tend to be stickier and have lower churn,” he said. Moreover, about a third of these customers represent “deals that qualify for a specific corporate discount.” 

“When you put all these things together, that should give some comfort to the stickiness of this base and our ability to maintain this base going forward,” Lindner said. “We’ll always strive to have a top-of-the-line device lineup.” Network performance and quality improvements will also help AT&T retain this base, he added. 

On the duration of the wireless carrier’s iPhone exclusivity deal, Lindner said that’s one thing that AT&T and Apple have agreed not to disclose. “But if you look at our numbers, at the end of the second quarter we had just under 9 million iPhone customers,” he said during Thursday’s conference call with investors. 

And even should AT&T’s exclusivity deal with Apple come to an end — either through mutual agreement or regulatory pressures — the effects wouldn’t be immediate. That’s because AT&T’s iPhone subscribers, both new customers and upgrades, must sign up for two-year contracts with data packages.

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