Although the carrier's wireless growth exceeded expectations, the loss of its iPhone exclusivity could mean a stagnant or declining customer base in future quarters

600 att iphone REUTERS Robert Galbraith.jpg

AT&T's third quarter earnings report released Thursday morning provided mixed news. The company slightly missed Wall Street's expectations for revenue, but its new wireless subscriber growth was better than expected. That second result should matter to investors. It implies that its iPhone users -- a huge source of its subscriber growth over the past four years -- weren't fleeing to Verizon. While this may pacify investors for now, AT&T's true test is still to come.

The Era of AT&T's iPhone Exclusivity

When the iPhone was first released in 2007, Apple chose AT&T to be its sole U.S. carrier. That exclusive relationship remained intact through early 2011 -- for nearly four years and four versions of the iPhone. Over this period, anyone in the U.S. who wanted an iPhone had no choice: AT&T was their only carrier option. As the popularity of the Apple smartphone grew, so did AT&T's subscriber base. The iPhone brought millions of new customers to AT&T from other carriers like Verizon and Sprint.

Then in February 2011, Apple produced a new iPhone 4. The original version, released in June 2010, could only be used on AT&T's network. But this new version could be used on Verizon's network. This marked the end of AT&T's iPhone exclusivity. In the second quarter, the first full quarter when AT&T would actually have to compete for iPhone activations, the company's iPhone sales held up fairly well. It sold approximately as many iPhone 4's during the quarter as it did in the first, at 3.6 million.

But the second quarter wasn't that serious of a test for AT&T. The big flood of iPhone 4 buyers would have come in the early months after the product was released. And anyone who wanted to buy the iPhone 4 could have done so for about eight months before Verizon entered the picture. So AT&T had a big head start.

Looking Ahead

Its real test will come this quarter. Last week, Apple released a new version of iPhone for the first time that would be available on three different carriers -- AT&T, Verizon, and Sprint. This should result in the number of new iPhone users who join AT&T to shrink significantly.

Let's think about the universe of potential new AT&T subscribers who want the iPhone. At this time, the three carriers that offer the iPhone account for about 70% of the market. If AT&T's acquisition of T-Mobile succeeds, then just 18% of the market will be left on carriers that do not support the iPhone. So unless customers defect to AT&T from either Verizon or Sprint, a very small population of current mobile phone users will be available to help AT&T's subscriber base grow through the iPhone.

And that assumes that you won't begin to see AT&T iPhone users flee to other carriers. You might. iPhone users' gripes about AT&T's network have become notorious. With the launch of the 4s, the largest portion ever of these AT&T-haters can finally give another carrier a shot to win them over when purchasing a new model of the device, by choosing either Verizon or Sprint.

Remember, the only past iPhone users who could have purchased a new one outside AT&T would have been those whose contracts were up between February and August of this year. Through last June, that limited the crowd to mostly those still using the four-year-old original iPhone or the three-year-old iPhone 3g, unless those using newer models were willing to pay early cancellation fees. This time, original iPhone, 3g, and 3gs users with expired contracts who plan to upgrade to a brand-new model upon its release will have the opportunity to do so through Verizon or Sprint.

But Many Consumers Love the Easy Route and Have No Patience

I was one of those 3g users: my contract had expired in June 2010, but I waited to switch to Verizon upon the release of a new iPhone model. When I got my 4s last week, I asked my Apple salesperson whether he was seeing many people leave AT&T. To my surprise he replied, "Not really." Most people just stay with whatever carrier they used before, he said.

Of course, this was just the experience of one salesperson in one Apple store. But it does demonstrate an important point: for any iPhone user to switch away from AT&T, the customer's hatred for the network must outweigh the headache of switching to a new carrier. In my experience, it hasn't been a seamless process. It took multiple calls to Apple to figure out how to get my contacts switched over to my new phone, and I had to edit every phone number to dial on Verizon's CDMA. Texts from my contacts are still mysteriously coming in showing phone numbers instead of people's names. But for me, the kinks that I'll work out eventually are worth the benefit of a better network. I was a loyal, content Verizon subscriber for six years before switching to the iPhone. I have already noticed the difference.

Additionally, many iPhone users clamor to get the newest version -- even before their contract is up. If certain conditions are met, carriers will allow them to refresh their contracts with another 2-year commitment. Anyone using AT&T will also still be stuck with the carrier if they aren't patient enough for their contract to run out.

So consumers' preference for the path of least resistance as well as their impatience could actually work to AT&T's advantage here in terms of iPhone subscriber retention. But that blessing may become a curse when it comes to AT&T's iPhone subscriber growth: the flipside is that Sprint and Verizon users won't be as likely to move to AT&T.

Ultimately, we'll have to see how the 4th quarter iPhone 4s activation numbers break down among carriers In the second quarter, AT&T accounted for just 61% of new iPhone purchases, while Verizon had already seized 39% of the market in its first full quarter carrying the device. Going forward, it looks like the best AT&T can hope for is its iPhone-based new subscriber growth to be near flat. That is, unless Verizon and Sprint begin to experience even worse network problems than AT&T did when iPhone users began stressing its network.

Image Credit: REUTERS/Robert Galbraith

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