AT&T: New iPhone 3G activation surge won’t bury margins

AT&T (NYSE:T) is expecting the same deluge of new customers for the just-unveiled Apple iPhone 3G S as it saw for the iPhone 3G’s debut last summer, but the operator said the cost of acquiring the customers won’t be as dire as it was last year when a huge of wave of activations drove its operating margins through the floor. AT&T reiterated its 2009 financial guidance today, after revealing the new speedier versions of the iPhone would go on sale June 19, estimating that its operating margins would remain above 40% in 2009.

After selling 2.4 million 3G iPhones last summer, AT&T saw its operating income before depreciation and amortization (OIBDA) margins fall dramatically due to the heavy subsidization costs it paid to lure in subscribers. Operating margins fell from 41.2% to 33.5% in six months, but in the first quarter of this year, they returned to pre-iPhone 3G levels as the new revenues from millions of high-value iPhone subscribers offset the customer acquisition costs of new activations. AT&T ended the quarter with operating margins at 40.9%, and today it said it expects overall margins for the year to be in the low 40% range.

The new Apple (NASDAQ:AAPL) iPhone 3G adds an ‘S’ after its moniker to indicate ‘speed’. Apple has beefed up the operating system to launch apps twice as fast as well as upgraded its radio chipset to support new upgrades AT&T is making to its high-speed packet access (HSPA) network. The previous iPhone peaked out at 1.8 Mb/s, but the new 3G S will have a chip that theoretically will support speeds as high as 7.2 Mb/s, though AT&T will likely limit the capacity available to individual users. Apple also upgraded other features such as boosting the resolution of the camera and adding voice commands.

The 3G S also moves the bar on pricing. The low-end version will have 16 GB of Flash memory, compared to 8 GB in the previous generation, and the high end will be 32 MB. AT&T and Apple will use the same price structure, charging $200 for the low-end device and $300 for the high-end, and they will drop the price of the original iPhone 3G from $200 to $100.

Demand for the old iPhone hasn’t yet died down—AT&T activated 1.6 million new 3G devices in the first quarter—but the new 3G S will likely produce another peak in sales. In a statement today, AT&T said the “cost of customer acquisition for iPhone 3G S and the newly priced iPhone 3G are expected to be very similar to the costs associated with the original iPhone 3G.” That implies that Apple is lowering the cost of the original iPhone so AT&T doesn’t have to incur even greater subsidization costs. Even though AT&T can probably expect another activation surge in the coming quarter, JBB Research principal analyst Julien Blin said he thinks AT&T will be able to keep its acquisition costs in check.

“If you assume that the acquisition costs remain the same, AT&T might be able to maintain its margins based on higher volume,” Blin said. “In other words, through the cheaper iPhone, they could generate more sales, more revenue, which might be enough to maintain their margin goal of 40%.”

In addition, AT&T is over the initial hump in activations and is now getting a steady and growing stream of data plan revenues from its existing iPhone customers, each of whom shell out more than $30 a month for data services. As long as AT&T is growing that data revenue pot, the effect of each new iPhone customer addition becomes smaller, Blin said.

“Based on AT&T's comments, I would think that AT&T is also unlikely to offer a cheaper data plan for the iPhone, which could hurt their margins,” Blin said. “Remember that AT&T essentially makes money on the iPhone by selling the associated data plans. Correct me if I am wrong but they are not getting money on the sale of the iPhone itself. If they can sell more iPhones--even for $99--this would mean more money from the sales of data plans and potentially the same or higher margins for them.”