AT&T braces for 'volatility' of Verizon iPhone intro

In what was likely the understatement of the earnings season, AT&T (NYSE:T) CEO and chairman Randall Stephenson today said that AT&T will experience “a little volatility” in the first half of the year due to the impending Verizon Wireless (NYSE:VZ, NYSE:VOD) launch of the iPhone 4. AT&T has enjoyed three years of phenomenal subscriber and data revenue growth because of the iconic Apple (NASDAQ:AAPL) device, but on Feb. 10 it’s set to lose its U.S. exclusivity of the iPhone, opening the gates for potentially millions of dissatisfied AT&T iPhone customers to flee to its arch competitor.

“We do expect healthy contract subscriber growth in 2011, even with the introduction of another carrier for the iPhone,” Stephenson said in AT&T’s Q4 and fiscal year 2010 earnings call. “Obviously this is going to make things a little harder to predict early on in the year, but with the introduction of Android and other devices we think the smartphone market will continue to be very strong for us. This is consistent with what you saw in the fourth quarter, which is our second highest smartphone quarter in our history. We also had a strong fourth quarter with tablets and connected devices. We expect that momentum to continue through 2011 and beyond.”

AT&T has done plenty to prepare itself for the Verizon onslaught. It locked down another 4.1 million new subscribers to an iPhone contract last quarter. Today, 90% of AT&T’s iPhone base is now under contract, according to chief financial officer Rick Lindner. But AT&T’s other metrics don’t necessarily back up Stephenson’s rosy picture of AT&T’s future without iPhone exclusivity. AT&T reported 7.4 million acquisitions of integrated devices, which AT&T basically defines as any device with a 3G connection. That means more than half of all mobile data device activations were iPhones, showing how much AT&T still depends on the device for growth. What’s more, AT&T’s net activations of 3G devices were only 3.4 million for the quarter, meaning it lost a lot of smartphone and 3G device subscribers, a good deal of which were probably iPhone customers.

Stephenson pointed out that the loss of exclusivity was never a secret, but AT&T still managed to secure more than 4 million iPhone customer commitments in Q4, showing that customers are still loyal to AT&T, not just the gadget it sells. But while the loss of exclusivity wasn’t a secret, until this month nobody knew when that loss would occur. Verizon and Apple made their CDMA iPhone announcement in the first quarter, giving Apple’s loyal legions their first hard date as to when another network option would be available. AT&T iPhone activations have surely suffered in January since the announcement came out.

No one can blame AT&T for painting a happy face on the situation, but Stephenson even put numbers to his predictions AT&T would weather the loss of exclusivity loss unscathed. While there would be volatility in the first half of the year due to the VZW launch, AT&T expects to grow its contract subscribers and Stephenson project 2011 earnings per share growth in the mid-single digits, driven by a new smartphone portfolio and growth in its wireline segments.

Depending on how you look at AT&T’s metrics, AT&T could be in fairly good shape when it comes to mobile data. About 60% of its postpaid base now uses an integrated 3G device, but AT&T doesn’t break out what percentage of those devices are smartphones versus messaging devices or feature phones. Verizon does break out smartphone numbers, announcing on its earnings call on Tuesday that smartphones account for 26% of its postpaid subscriber base. While AT&T probably exceeds that percentage due to three straight years of iPhone sales, a closer look at data revenues would indicate the two operators are closer in smartphone penetration than the percentages would indicate.

Verizon’s wireless data revenues are actually higher than AT&T’s, $5.3 billion in Q4 versus AT&T’s $4.9 billion. Verizon’s Q4 postpaid average revenue per user (ARPU) attributable to data was lower than AT&T’s—$19.97 a month versus $22.64—but the discrepancy is likely explained by the fact that Verizon has a larger postpaid base than AT&T. Smartphones generate a lot more revenue than feature phones, contributing heavily to rising data ARPUs. Verizon has been steadily closing the gap between itself and AT&T even without the benefit of the iPhone, either by matching AT&T in smartphone and connected device sales or by charging more for mobile data plans.

In an odd twist, AT&T appears to be countering its competitor by adopting Verizon’s previous smartphone strategy. AT&T’s new 2011 portfolio, particularly those that will be marketed as 4G devices, lean heavily toward Android, the Google (NASDAQ:GOOG)-platform that Verizon championed while it was barred from the iPhone. Stephenson said it will put far more emphasis on Android and other smartphone platforms in the wake of the Verizon iPhone launch.

“We’ve not been very aggressive in the Android portfolio,” Stephenson said. “We’re going to be a heavy participant in the Android market this year. You’re going see a significant shift in mix. Then you add Windows 7 and [Research in Motion’s] products, which are starting to do very well and getting a lot of traction in the market and our sales channels, we think we’re going to have a nice mix shift and do quite well in those areas.”

And while AT&T will certainly take a big hit in iPhone sales, it’s not as if those sales they’ll disappear entirely. If Apple launches a high-speed packet access plus (HSPA+) version of the iPhone this summer, AT&T will have a powerful marketing tool at its disposal. AT&T has taken plenty of knocks lately on the reliability and speeds of its network, but it will claim that AT&T is capable of delivering a much faster ‘4G’ iPhone data plan, while Verizon is still locked in 3G.

“We’re really starting to feel good about the network situation,” Stephenson said. “We’ve spent the last 45 days bringing capacity online in a dramatic fashion.”