The iPhone 3GS makes AT&T numbers look great

Posted by Andru Edwards Categories: Apple, Smartphones, Corporate News

AT&T has revealed its first-quarter earnings, and things certainly smell like they're coming up roses for the carrier. That's probably expected considering it's destined to soon become the nation's largest wireless provider thanks to its recent move to acquire T-Mobile. But there was one part of the company's results that was a bit surprising: the debut of the Verizon iPhone appeared to have little effect on AT&T's iPhone subscriber base. Were there really that few people switching when AT&T finally lost its exclusive grip on the device?

AT&T said it activated 3.6 million iPhones last quarter, the first quarter the Verizon iPhone was available. It also said iPhone subscriber "churn," or the number of iPhone owners ditching AT&T for another carrier, was unchanged from the same period last year. During a call this morning, company executives said the impact was, "significantly less than many in the financial community and the media expected and, frankly, they were less than we expected."

After a close look at the numbers, an X factor becomes apparent: the iPhone 3GS. In January, AT&T reduced the price of the 8GB iPhone 3GS from $99 to $49, and it's been pushing the discounted phone hard. The 3GS is a very capable smartphone and looks extremely cheap next to the iPhone 4, which starts at about $200 on both Verizon and AT&T. Of course, Verizon doesn't offer the iPhone 3GS, so any iPhone cravers not willing to pony up a couple of C notes will be going to the AT&T store (or eBay where you can get them cheap without contract.)

Tellingly, the numbers AT&T provided don't break down how many of those iPhone activations were iPhone 4s or iPhone 3GSes. Even if iPhone subscribers—both new and existing—are flocking to Verizon, the losses to AT&T's overall iPhone subscriber base would be mitigated by thrify customers snapping up the now ultra-cheap iPhone 3GS.

None of this is to suggest that AT&T is being deceptive here. In fact, the company should be congratulated on employing an effective tactic to keep iPhone subscriber numbers healthy in the wake of losing exclusivity on the device to a strong competitor. After all, a customer is a customer, and a two-year contract is a two-year contract, regardless of which iPhone they're using.

But price-slashing the previous model won't be an effective long-term strategy. When the iPhone 5 debuts (whenever that happens), both carriers will have warehouses full of iPhone 4s ripe for a discount. Add to that the iPhone owners who are simply holding out for the next model before they switch, and I suspect that in a couple of quarters, AT&T's iPhone churn numbers will start to see an uptick.

The first clue will come this morning, when Verizon releases its first-quarter earnings. If the company's iPhone sales numbers truly are its "best in history"—and if many of those customers are new subscribers—it's probably an indicator that the impact of the Verizon iPhone was more than AT&T would like to believe. Then, with a little luck, AT&T might realize it actually has to come up with something better than a price cut to compete effectively for iPhone customers' hearts and minds. How about fewer dropped calls, for starters?

This article, written by Peter Pachal, originally appeared on PCMag.com and is republished on Gear Live with the permission of Ziff Davis, Inc.