AT&T Sold Record Number of iPhones in Big Wireless Quarter

AT&T added and retained more wireless customers in the third quarter than it had in any previous Q3, the carrier said Thursday. And it sold a record number of Apple iPhone handsets, though many were to subscribers it already had. AT&T mobile broadband “is approaching a $20 billion a year business, and the business is growing at 25-30 percent,” Chief Financial Officer Rick Lindner said on the carrier’s earnings call. Wireline isn’t achieving the same success, but Lindner said the carrier isn’t thinking about ditching the business.

Voice revenue from business customers is falling, Lindner said. “The one area that has been a drag in the business somewhat is voice volumes.” But AT&T still believes there are advantages to keeping both its wireline and wireless businesses, Lindner said. To provide bandwidth, capacity and good service, “you've got to drive that traffic as quickly as possible into a wired infrastructure."

"There’s not enough spectrum to be able to take everything that you're sending over wired facilities and put it on wireless, especially when it comes to video,” said AT&T Mobility CEO Ralph de la Vega. “In the end, you always need a combination of both.” It’s good for the health of U.S. spectrum that more companies are adopting tiered data rates allowing customers to pay less to consume less data, said de la Vega. Verizon Wireless recently followed AT&T in adopting such a pricing structure. “I'm glad to see that more and more in the industry are in fact realizing that spectrum is a valuable resource and are pricing data consistent with a valuable resource,” he said. “That is fundamentally the right approach for the long-term benefit of the industry."

AT&T aims by year-end to complete a network software upgrade to raise its wireless network to HSPA+, de la Vega said. The company, meanwhile, “is making progress” on backhaul upgrades, he said. The carrier has LTE trials in Dallas and Baltimore and plans to launch in mid-2011 to reach 70-75 million POPs before 2012. In Q4, AT&T also will start to aggressively move former Alltel customers to newer GSM networks and billing systems, said Lindner. “In the course of doing that, we're going to have to provide that base with new devices, and there'll be subsidies involved in that.” That may affect wireless margins “for the next two or three quarters,” he said.

AT&T added 2.6 million net wireless subscribers in Q3, and now has 92.8 million total. But 1.2 million of those adds came from connected devices like the Amazon Kindle, sold with a free AT&T 3G subscription. AT&T said it added 745,000 net postpaid retail customers and 321,000 net prepaid customers. Postpaid churn was 1.14 percent, matching the third-quarter record low set last year. Total churn was 1.32 percent, down from 1.42 percent in Q3 2009 and a new third-quarter record for AT&T. Total wireless revenue increased 11.4 percent year-over-year to $15.2 billion.

Devices with data capabilities were a major factor in AT&T’s wireless growth. The company sold 8 million postpaid “integrated” devices that combine voice functionality with QWERTY or virtual keyboards, it said. About 5.2 million were Apple iPhones, the most iPhone activations that the carrier has had in a single quarter. But only 24 percent were for new AT&T subscribers. The company said 57.3 percent of AT&T’s 67.7 million postpaid subscribers have integrated devices, up from 42 percent in Q3 2009. Data revenue increased 30.5 percent year-over-year to $4.8 billion in Q3. AT&T said it makes 1.7 times more revenue on average from integrated devices than from others.

AT&T’s consumer wireline business increased just 0.2 percent to $5.3 billion. Residential voice connections dropped 11.4 percent year-over-year to 24.9 million. AT&T added 148,000 wireline broadband customers in Q3 and now has 14.1 million. Total wireline revenue dropped 3 percent year-over-year to $15.3 billion. Meanwhile, AT&T added 236,000 net U-verse TV subscribers and now has 2.7 million. More than 90 percent also get U-verse High Speed Internet, and 60 percent also have U-verse Voice. Combining U-verse and satellite TV subscribers, AT&T has 4.7 million video subscribers. Planned additions to U-verse TV include the capability to pause and rewind live TV in any room, and the rollout of a fourth simultaneous HD stream, AT&T said.

Most of AT&T’s iPhone gain likely came from a promotion to retain customers who might leave for Verizon when AT&T loses exclusivity on the popular Apple device, said analysts at Bernstein Research in a note Thursday. “At $375 subsidy per activation, the increase in iPhone activations alone” cost $750 million in the quarter, the analysts said. But the “two year lock-up of iPhone subscribers positions AT&T much better versus Verizon than consensus expectations seem to expect.” Smartphone growth also led to higher operating costs, Bernstein noted. AT&T said its total spending was up 31.8 percent from last year’s, more than most Wall Street analysts expected. AT&T shares fell 0.87 percent Thursday, landing at $28.36 at the market’s close.