Life After iPhone Exclusivity – The Outlook for AT&T

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AT&T ( T ) competes primarily with Verizon ( VZ ) and Sprint ( S ) in the mobile phone business. The company has had a great ride with Apple's ( AAPL ) iPhone on its side. However, as the exclusivity nears a probable end, AT&T is looking towards newer ways to market itself and reduce its dependence on the iPhone.

Our price estimate for AT&T is $37.84 , implying about 30% upside to market price. We estimate that 45% of this stock value is generated by the company's mobile phones and plans.

Here we examine the outlook for AT&T in the wake of an impending Verizon iPhone launch.

iPhone Price Cut

From Jan 7, 2011 onwards, AT&T will be cutting the price of its iPhone 3GS model from $99 to $49. Part of this comes from its attempt to clear remaining inventory as consumers increasingly adopt the iPhone 4 (and iPhone 5, which might be released later this year). AT&T might also be trying to engineer one more push to lock in new contract commitments as the probable end of iPhone exclusivity nears.

To enact this type of price reduction, AT&T must eat the cost difference, meaning higher phone subsidies for customers and lower gross margins for AT&T. While the margin impact from iPhone 3GS discounting is unlikely to be material (given that this model is no longer the prime driver of new unit sales), AT&T's stock value could be pressured if this discounting strategy is ultimately expanded to newer models as a means of maintaining market share.


Android to the Rescue

AT&T's smartphone strategy for 2011 is heavily influenced by the probable loss of iPhone exclusivity. Fittingly, the company recently announced during the 2011 Consumer Electronics Show that it will be emphasizing Android-based smartphones.

Can this move sustain AT&T's market share gains?

The Android OS has been gaining market share rapidly in recent quarters, according to data from tech research firm Gartner. In the second quarter of 2010, worldwide sales of Android-based phones surged to 10.6 million, up from just 755,000 in the year-ago quarter. Android-based phones accounted for nearly 18% of worldwide smartphone sales in the second quarter of 2010, up from about 2% in the second quarter of 2009.

Emphasis on Android can help AT&T maintain recent market share momentum despite losing its hold on the iPhone.

4G Marketing Gimmick

While AT&T has lagged behind some competitors in launching a 4G network (which is primarily LTE), the company is looking to resort to a new marketing technique by labeling its HSPA+ upgrade as 4G. The company states that the speed difference between HSPA+ and LTE will be not noticeable until richer applications come out, thus justifying the 4G label. Still, the decision appears to be a marketing gimmick in the wake of competitive pressures.

With the likely launch of a Verizon iPhone fast approaching, AT&T seems to be positioning itself for life after iPhone exclusivity. New marketing strategies and an emphasis on Android-based phones can strengthen the company's mobile phone operations, but it remains to be seen whether this will be enough to offset the coming storm.

Let us know your thoughts on AT&T's outlook by providing feedback in the comment box below.

You can see the impact of various mobile phone profit margin and market share scenarios on AT&T's stock value by dragging the trend lines in the modifiable charts above.

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You can see the complete $37.84 Trefis price estimate for AT&T's stock here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AAPL , S , T , VZ

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