There's a good piece from the Wall Street Journal today that argues AT&T's return on the iPhone has not been not nearly as great as it probably hoped. This in conjunction with additional news that Apple might be almost ready to end AT&T's exclusivity may produce an interesting result: AT&T might not be able to afford to fight to stay the sole U.S. iPhone service provider. If the market opens up, and it probably will, I would expect to see a mass exodus of iPhone users from AT&T.

Let's start with how the iPhone has really affected AT&T. As a bit of broad-level evidence, the WSJ piece includes the following chart, mapping out share performance of Apple and AT&T since 2007:

apple v att.gif

Of course, the iPhone is only a part of what's being shown here. AT&T also offers many others phones. Apple also offers many other products. Still, most would probably argue that Apple's positive share performance was due in large part to the iPhone. Similarly, AT&T's lackluster performance was likely in spite of the iPhone. So let's drill down.

The WSJ piece indicates that AT&T has had at least 10 million activations since the iPhone was introduced, but only 35-40% of those were new customers. The article admits, however, that retaining those other 6 million customers was still key for AT&T. Until the iPhone, few people I knew felt like staying with AT&T, given its notoriously weak network. The network has improved significantly since that time, but in my experience, it still pales in comparison to some others, most notably Verizon. As a result, I think this is a pretty big score for AT&T, to manage to retain or attract 10 million customers despite having what many would describe as an inferior network.

But the article also reports a claim from J.P. Morgan Chase analyst Mike McCormack who says that AT&T's $400 per iPhone subsidy has depressed its profit margins:

The metric AT&T emphasizes for its wireless division, operating income before depreciation and amortization, as a percentage of service revenue, has dropped from 41.2% in the second quarter of 2008, before the subsidy began, and has bounced in a range of 33.5% and 40.9% since. AT&T has said repeatedly it expects the margin to rise to the mid-40s long term.

Another good observation from the WSJ article has to do with the iPhone's increased usage compared to other smart-phones:

It is no secret that iPhone users download games, video and other Web data at two to four times the rate of other smart-phone users. Yet AT&T charges the same $30-a-month fee for unlimited data use it levies on its other smart-phone customers.

That additional usage adds greater expense for AT&T regarding iPhones. The bloated usage is also one of the culprits for AT&T's network problems. So wouldn't Verizon or any other carrier experience the same problem? Maybe:

It is possible Verizon's network would have reacted similarly if that company had offered the iPhone. No matter: It seems likely that if Verizon eventually gets the right to offer the iPhone, some of those four million customers who signed up for AT&T may defect. Indeed, some of the older AT&T customers also may go.

I completely agree. Now let's add to this analysis more news out today that Apple might decide to end AT&T's exclusivity soon, as it makes better profits from having its phone on multiple carriers. The claim comes from research analyst Gene Munster of Piper Jaffrey, via AppleInsider:

"For various reasons the company moved from an exclusive relationship with French wireless carrier Orange to a multi-carrier model," Munster said. "In France, the company now enjoys dramatically higher market share (in the 40 percent range vs. about 15 percent in ROW) than in countries with exclusive carrier agreements (such as AT&T in the U.S. where the iPhone has market share in the mid-teens). We believe Apple is seeing the increased unit sell-through more than offset the slightly (~10 percent) deteriorated economics per unit involved in non-exclusive agreements."

Because of this, he predicts that Apple will add more carriers next summer. Such a fate would be disastrous for AT&T. As an iPhone owner myself, I would quickly switch over to Verizon at that time, my carrier before the iPhone. I can never remember Verizon dropping one of my calls in five years. AT&T, on the other hand, drops my calls regularly. It has enhanced its network noticeably since I got an iPhone last year, but their network still leaves much to be desired.

I would expect to see AT&T fight hard to keep its exclusivity. But its efforts may be in vain of Munster is right. At the end of the day, Apple will choose whatever strategy it believes will most benefit its market share and profits. Moreover, the WSJ piece indicates that AT&T probably can't afford a much higher subsidy and keep its iPhone accounts within the realm of profitability. That may leave Apple with little choice but to open up the market. That may be bad news for AT&T, but it's great news for iPhone users.

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