AT&T price cut could juice iPhone sales

May 1, 2008: 4:28 PM ET

By Scott Moritz

AT&T's (T) planned $200 subsidy on Apple's (AAPL) iPhone could increase the sales of the new 3G model by 50%, according to one analyst.

Using a comparison to price cuts of Motorola's (MOT) Razr -- the 110-million-units-sold wonderphone from yesteryear -- Bernstein analyst Toni Sacconaghi says its reasonable to expect that AT&T could more than double its iPhone sales, which currently account for half of all Apple's iPhone numbers. He made the analysis after Fortune first reported the plan by the Apple's exclusive iPhone partner to cut the price of the upcoming 3G version of the phone.

Sacconaghi sees a strong parallel in the scorching history of Motorola's Razr phone. In 2005, Razr's expensive ultrathin metal-clad design went from being the coveted phone of the moment to a pop culture sensation as the price fell.

"The Razr's unit sales run-rate doubled when its price dropped from an initial $500 to $150, then doubled again when the price fell further to $100," Sacconaghi wrote in an Apple research note Thursday.

"While offering the subsidy would cost AT&T $200 per iPhone user, we estimate the cost would be more than offset if the subsidy results in an increase in the iPhone subscriber base of around 100% - which appears to be a realistic assumption in light of the Razr's experience," he wrote.

Sacconaghi is an Apple analyst but he says he has not confirmed the price cut plan with Apple or AT&T.

Cell phone and smart phone subsidies are common throughout the U.S. and Europe. The iPhone was unusual in that it was sold at full price. Despite the hefty $400 price tag, Apple has sold 5.7 million iPhones, over half the way to its goal of 10 million for the year.

For AT&T, the phone is fantastic bait to reel in customers from rivals like Verizon Wireless (VZ), Sprint (S) and T-Mobile (DT), at a time when wireless growth is slowing. To date, AT&T says about 40% of iPhone customers are coming from other services. Not only does the iPhone lure customers, it brings in the type of customers that the industry cherishes: big spenders.

AT&T says it rakes in an average of $95 a month from each iPhone customer, nearly twice the average monthly bill of its conventional cell phone user. With faster 3G phones, it's likely that iPhone fans will spend even more money time on the mobile Internet. AT&T has a revenue sharing agreement with Apple where it forks over as much as 25% of its iPhone customers' monthly payments to the company.

The remaining take for AT&T is between $70 and $75 a month per iPhone user totaling more than $1,700 over the life of the two-year contract, wrote Sacconaghi.

AT&T plans to lock the subsidized iPhones so they can't be used on other companies' networks. That leaves it open to debate whether Apple will sell unlocked, unsubsidized phones at its stores. Sacconaghi says people might pay a premium for an unlocked iPhone, untethered as it would be from the AT&T service. "We believe the availability of factory-unlocked iPhones would further stimulate overall iPhone sales, though price may remain a barrier to truly mass market adoption."

The mass market however, is a double-edged blade as Razr observers will note. Razr's ride to popular glory was followed by a plunge into ignominy as the price of the phone went to zero, a precursor to the downfall of the Motorola's mobile phone business. But that is one Razr parallel Apple fans aren't likely to make.

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