Make hay while the sun shines is what best describes AT&T‘s (T) current strategy on the smartphone market. Despite the present economic upheaval and loss of exclusivity on Apple’s (AAPL) iPhone sales in February this year, the company continues to deliver jaw-dropping smartphone sales figures, thanks to the iPhone frenzy.
AT&T recently projected smartphone sales to break the historical mark of 6.1 million and set new records in its ongoing fourth quarter. The company has already sold approximately 6 million smartphone during the last two months and with the gift giving season still on, a new quarterly high seems quite likely.
Given the launch of iPhone 4S on October 7, simultaneously by three mega carriers including Sprint (S) and Verizon (VZ), AT&T hit bull’s eye with more than 200,000 preorders for iPhone 4S within the first 12 hours and over one million iPhone 4S sales during the first six days of launch.
Smartphone market has grown leaps and bounds over the past years with nearly 87 million users as of September 2011. On an annualized basis, smartphones registered an astonishing growth over 70% in 2010. Latest surveys suggest that smartphones own approximately 37% of the mobile market share (as of September 2011) and this figure should cross 40% in 2011.
Catching up with the smartphone fervor, iPhone contributed nearly 40% of smartphone sales in the U.S. during the third quarter, coming a close second to Google’s (GOOG) Android market share of 43%.
Carrier wise, iPhone accounted for approximately 56% of the total smartphone sales (approximately 4.8 million) of AT&T followed by 36% of the total sales (approximately 5.6 million smartphones) on Verizon’s network.
Going by the iPhone track record, we believe AT&T is playing a safe bet on the current momentum of this iconic phone. We also expect the iPhone to reap higher revenues for AT&T going forward. But the real question is – how far AT&T can bank on the iPhone? We wonder if this is the right time for the company to shift its focus on the emerging market players in the smartphone arena.
iPhone has definitely carved a niche in the market and positioned AT&T ahead of its rival with higher margin performance. But given the current economic backdrop where consumer are increasingly shifting focus on cost effective data plans and smartphones, it remains to be seen whether “Apple” will continue to taste sweet for AT&T?
Though iPhones have enjoyed a strong momentum, high marketing or subsidy costs associated with the product are restricting AT&T’s earnings. The carrier is currently paying a hefty subsidy of approximately $300 per phone to Apple, which is dilutive to its earnings. Additionally, AT&T already runs the risk of competition from the likes of Verizon and Sprint given the loss of exclusive marketing rights of iPhone.
The emergence of the Android operating system as the latest rage has given it the top position in terms of market penetration, surpassing the most commonly used operating system, Nokia’s (NOK) Symbian. Accordingly, it has also eaten into the market share of both iPhone and Research in Motion’s (RIM) Blackberry with high-end smartphones from another leading manufacturer – Samsung.
We believe all these factors will play a determining factor in iPhone’s long-term growth and aid AT&T in making structural changes in terms of its smartphone offering with more cost effective plans.
We are maintaining our long-term Neutral recommendation on the stock with the Zacks #3 (Hold) Rank.
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