Recently AT&T announced its plan to drop the deal it had with Apple to share in monthly service revenue. Just sharing revenue in the first place with the manufacturer was a strange move.

Most cell phone manufacturers sell the phones to the service provider and don’t get to see a cent of the revenue generated by the monthly service plans. This is how the new agreement will be with Apple and AT&T.

This will mean that initially AT&T will have to face a bigger hit in earnings, but reap pay-off in the long-term. In AT&T’s press release, the company said it predicts a hit to its earnings by 10 to 12 cents per share for the next 2 years. However this should ensure them a gain in profit by 2010.

Cutting off a long term steady revenue stream away from Apple is a smart move, considering the service plans are where providers make the most money.

AT&T will now just purchase the iPhone directly from Apple and sell them at a substantially subsidized cost to consumers with a new data plan. This should, in effect, give Apple a smaller profit margin, considering data attachment has a higher profit margin then CE hardware sales of the phone itself.

Apple’s contract to sell the latest iPhone exclusively to AT&T also limit’s the company’s market potential as well. With reduced profit margin, the trade-off should be a higher market share, but only one service provider selling the iPhone greatly reduces or limits the maximum sales potential for the hardware.

This could inevitably open up opportunities for other potential service providers to get in on the iPhone market once AT&T’s exclusivity deal runs its course.

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Entry was posted on Saturday, June 14th, 2008 at 9:04 pm under Apple, Cell phones.

Read more entries by Mike Ferro.
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