Apple's iPhone Bails Out ATandT

There's a good reason why AT&T is anxious to renew its deal with Apple to be exclusive U.S. carrier of the iPhone: it's a difference maker for the telecommunications giant as AT&T's first quarter results show.

Hammered again by declining landline subscribers, AT&T's overall first-quarter profit dropped 9.7 percent from a year ago, but the company's wireless division -- driven by new iPhone subscribers -- recorded a net gain of 1.2 million subscribers. AT&T said 875,000 of the new wireless subs signed contracts, a very healthy 24.1 increase from the first quarter of 2008.

AT&T also reported 1.6 million iPhone activations during the quarter and overall wireless data revenue increased 38.6 percent to $3.2 billion. The growth primarily came from data hungry iPhone customers accessing the Internet for Web surfing, messaging and e-mail.

Analysts eagerly awaited the company's first quarter numbers to see if the so-called "iPhone effect" would fade for AT&T. A number of analysts had speculated that AT&T's heavy subsidies of the iPhone would eventually take its toll, but AT&T said the data subscriptions were worth the subsidies.

"We said that our upfront investment in iPhone customers would depress margins in the short-term," AT&T Chief Financial Officer Rick Lindner said on a conference call. "But given the attractive customer profile, it would support margins in the quarters and years ahead, and that's what you see in our first quarter results."

AT&T offers iPhone subsidies for customers signing two-year contracts that include Internet data plans that sell for approximately $70. Under the contracts, an 8GB iPhone sells for $199 and the 16GB version goes for a subsidized $299. Without a contract, the 8GB model retails for $599 and the 16GB iPhone for $699.

Overall, AT&T recorded a 13 percent increase in wireless profits and a nearly 9 percent gain in wireless revenues. The company also said customer churn among smartphone owners was only 1.2 percent.

"AT&T is well positioned for the next wave of wireless growth," said Lindner. "The foundation is a strong spectrum position ... second is great device lineups with exclusives like the iPhone and BlackBerry Storm."

In last year's auction by the FCC, AT&T paid $6.6 billion for a swath of spectrum to pave the way for the company's move into 3G and 4G markets. The spectrum will come from airwaves being deserted by television broadcasters as part of the digital television transition.

AT&T refused to speculate on rumors of a new iPhone release sometime this summer, nor did the company comment on the ongoing negotiations between AT&T and Apple to keep its exclusive iPhone contract.