How Will AT&T Fare Without iPhone Exclusivity?

AT&T reported strong third quarter earnings Thursday morning. The company's profit rose to $12.3 billion during the period from just $3.2 billion a year earlier. A large portion of that growth was thanks to the iPhone. AT&T activated the highest number of iPhones in any quarter, with 5.2 million. This raises an obvious question: What happens when AT&T loses iPhone exclusivity?

It's hard to overemphasize how important the iPhone has been to AT&T's wireless growth. According to AT&T, "more than 8 million" smartphones were activated during the third quarter. That means that the iPhone probably accounted for around 65% of its total smartphone activations.

If you take iPhone exclusivity out of the equation, it will drastically harm wireless growth. Of those activations, 24% were new to AT&T. It's very plausible that far fewer of those 1.25 million activations would have switched to AT&T. Without them, AT&T's total activations would have been 15% lower.

Absent AT&T's exclusivity, many of the current AT&T subscribers that made up the other 76% of iPhone activations would likely have switched carriers as well. Right now, if you like the iPhone, you have no choice but to use AT&T. According to a recent poll of iPhone 4 owners, around 75% expressed frustration with AT&T. So if they wanted to give a Verizon iPhone a try next time, for example, then AT&T's wireless revenue growth would take a major hit.

Moreover, AT&T set a record for the lowest total churn -- a measure of customer attrition -- in the third quarter. Again, this will almost certainly change if frustrated iPhone users have the opportunity to give Verizon or others a try. In short, much of the best news from AT&T's earnings report is dependent on its iPhone exclusivity.

And it's almost certainly coming to an end in 2011. There have been numerous reports from legitimate sources that a Verizon iPhone is in the works. Indeed, the news that Verizon will begin selling the iPad, even though its network doesn't actually support the device, provides evidence that a Verizon iPhone must be coming. After all, the company wouldn't bother to bend-over-backwards to accommodate the iPad if it wasn't trying to nurture a new relationship with Apple.

Ending AT&T's exclusivity is also becoming essential to Apple's strategy. Android competition is growing stronger and stronger. As long as the iPhone is only offered through one carrier, its potential buyers are limited to only those who don't mind being forced to use the device through that one network. Apple held a commanding lead over Android devices a few years ago, but now it must evolve and broaden its offering of service providers.

AT&T won't be completely sunk once its iPhone exclusivity ends, however. Its U-verse television service also holds promise. Frustrated cable users will increasingly consider switching to AT&T's U-verse and Verizon's FiOS over the next several years. Moreover, there will definitely be plenty of customers who are content with AT&T's wireless network and won't want to switch. But it's pretty clear that AT&T's aggressive wireless growth won't continue at anywhere near the same pace when iPhone owners aren't forced to use its network.