While the release of the iPhone 3G helped drive AT&T’s revenue higher in the third quarter, the gains were largely eroded by subsidies paid to Apple for the device. Now AT&T is being forced to lower its 2008 margin estimates as iPhone sales continue to surpass expectations.

AT&T’s revenue grew to $3.23 billion during the quarter, up from $3.06 in the same period last year. Wall Street was somewhat less chipper about news that the company’s adjusted earnings per share came in at 67 cents a share when analysts’ predictions were close to 71 cents a share.

AT&T agreed to subsidize sales of the iPhone 3G as part of its agreement with Apple to be the exclusive service provider for the device in the US market. Payments to apple for the device devoured $900 million in profit during the quarter, or about 10 cents per share.

A little back-of-the-envelope math reveals that AT&T is paying $375 in subsidies for every single iPhone customer it acquires. That’s right; it’s actually more expensive for AT&T to sell you an iPhone than the price that you pay for it.

Only Apple could get away with forcing a carrier into such an obviously lopsided arrangement due to the fervor of its fans. No other phone launches in recent memory have drawn such massive lines outside of AT&T stores across the country as the iPhone and iPhone 3G.

However with over 2.4 million iPhone 3Gs sold since the July 11 release date, both companies are becomingly increasingly reliant on the iPhone as their engine for growth. While the device has been blowing out sales projections left and right, there’s no telling what the impacts of the weakening economy could be or when demand could drop off.

So far, strong sales are continuing to buoy AT&T through choppy economic waters. However, the question remains whether these customer acquisition costs will bear out for AT&T in the long run.

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Entry was posted on Wednesday, October 22nd, 2008 at 10:58 pm under Apple, Cell phones.

Read more entries by Dave Jeyes.
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