Technology :: Personal Tech

Monthly Smartphone Bills Down at AT&T

by Peter Svensson
Wednesday Apr 25, 2012
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NEW YORK (AP) - Hidden in AT&T Inc.’s financial statements is a story that runs counter to its optimistic profit projections: The company is generating less revenue from each new smartphone subscriber.

Calculations by The Associated Press, based on AT&T’s public statements, indicate that the average monthly bill for its smartphone subscribers has fallen from $88 to $80 in the space of a year.

That number should be of great concern to Dallas-based AT&T, because like most big phone companies, it is struggling with a slowdown in new subscribers. Nearly all adults - and many kids - in the U.S. already have cellphones. AT&T’s executives have been touting smartphones as the solution, since the devices require consumers to pay for data use in addition to voice calls. Smartphone subscribers, therefore, pay more. So moving customers from regular phones to smartphones will keep boosting revenue, AT&T has said.

But an analysis of AT&T’s own figures indicates that smartphone bills have shrunk by 9 percent over a year, challenging the company’s picture of long-term revenue growth.

The AP’s calculations are based on various figures AT&T makes public - and a bit of basic algebra. The company doesn’t disclose the average smartphone bill, but says it’s 90 percent higher than the average non-smartphone bill. AT&T reveals the number of smartphone and non-smartphone subscribers, and the average monthly bill for a contract-based plan, which is $64.46. Together, these numbers allow for an approximate calculation of the average smartphone bill.

AT&T did not explicitly confirm the calculations, but its chief financial officer, John Stephens, said that the composition of new smartphone customers is changing. The early smartphone adopters were business people and others willing and able to pay high monthly fees. Now, AT&T and other phone companies are going after people who can’t pay as much.

"We go after the biggest spenders at the start, that’s natural economics," he said.

But even these lower-paying customers are profitable, he said, because they use the network less.

In a more typical projection, Ralph de la Vega, the head of AT&T’s wireless division, told analysts Tuesday that demand for wireless data is going to continue to drive an increase in monthly bills.

"Quite frankly, it’s hard for us to see a cap on that," de la Vega said.

Bills for non-smartphone subscribers on contract-based plans are shrinking at about the same rate. Only by shifting these subscribers to smartphone contracts has AT&T been able to keep its average monthly bill for all contract-based plans rising, by 1.7 percent from a year ago.

AT&T, the country’s largest telecommunications company, reported first-quarter results Tuesday morning, showing that it essentially gained no phone subscribers on contract-based plans in the first quarter. That’s only happened once before: a year ago, when Verizon launched its version of the iPhone.

Contract-based plans are by far the most lucrative for a phone company, and the number of new customers is an important measure of growth.

AT&T gained a net 187,000 customers on contract-based plans in the January to March period, but these were almost all tablet computer users, brought in by the launch of the new iPad in March.

In contrast, Verizon last week reported adding 501,000 subscribers on contract-based plans, of which about half were tablet users.

Over the last five quarters, Verizon has added nearly three times as many contract subscribers as AT&T. Over the previous two years, the rivals split new subscribers nearly evenly.

AT&T gained a net 726,000 subscribers of all kinds in the first quarter, counting ones on no-contract plans and ones on non-phone devices like e-readers and tablet computers. That was the lowest figure in eight years, and less than a third of the number of subscribers added in the same period last year.

De la Vega said a drop in sales of e-readers that connect to AT&T’s network was behind much of the smaller increase in overall subscribers.

Amazon.com Inc. has been selling Kindle e-readers that use AT&T’s network, but its new flagship device, the Kindle Fire, only uses Wi-Fi.

Weak subscriber figures are usually good for a phone company’s earnings in the short term because it doesn’t have to subsidize new devices.

The company’s net income for the January-March period was $3.6 billion, or 60 cents per share, up 5 percent from $3.4 billion, or 57 cents per share, a year earlier.

Analysts polled by FactSet were on average expecting earnings of 57 cents per share for the latest quarter.

In particular, AT&T saved money by selling fewer iPhones than analysts expected. AT&T subsidizes each new iPhone by hundreds of dollars, hoping to make the money back over time in the form of service fees.

AT&T said it activated 4.3 million iPhones in the first quarter. That was down from 7.6 million in the fourth quarter, when AT&T began selling the iPhone 4S. However, the number was still up from the 3.6 million iPhones AT&T sold in the same quarter a year ago.

Revenue was $31.8 billion, up 2 percent from a year earlier. It matched analyst expectations.

AT&T shares rose $1.11, or 3.6 percent, to close at $31.72. The shares are close to the four-year high of $31.97 hit a month ago.

Macquarie Securities analyst Kevin Smithen said the strong first-quarter earnings could mislead investors. He said he believes AT&T’s profits will shrink this year as it upgrades more handsets, even as it continues to lose market share to Verizon.

Craig Moffett, an analyst at Sanford Bernstein, was more optimistic, saying the first-quarter results demonstrated "the successful handoff from growth to profitability." It’s possible, he said, that AT&T will be able to wring more money out of each wireless subscriber through data usage fees. It also looks like the company is getting better at reining in smartphone subsidies, he said.

Copyright Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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