Weak third-quarter iPhone sales herald big holiday for carriers

AT&T and Verizon Wireless both report uninspiring iPhone and smartphone growth in the third quarter as customers held off in anticipation of the iPhone 4S.

For once, Apple's iPhone wasn't a major catalyst for customer growth at AT&T or Verizon Wireless.

This week, both carriers reported mildly disappointing wireless subscriber growth in the third quarter. Both also blamed the lack of a new iPhone (the iPhone 4S launched after the end of the reporting period) for the weakness.

That AT&T's and Verizon's wireless fates were so closely tied to a single smartphone that is more than a year old speaks to the strength and influence of Apple. More importantly, the sluggish numbers in the third quarter were largely attributed to consumers waiting for the next iPhone, suggesting a sharp rebound during the holiday quarter.

The two carriers only reaffirmed that sentiment during their respective third-quarter conference calls.

"We expect blockbuster smartphone sales in the fourth quarter," Ralph de la Vega, head of AT&T's mobility and consumer business, said yesterday during the company's investor call. He further fueled the expectations by saying the results would be "unbelievable."

Verizon avoided using the same kind of hyperbole, but was upbeat nevertheless.

"As far as the iPhone 4S goes, we're extremely pleased with our sales," said Verizon Communications Chief Financial Officer Fran Shammo after the company's third-quarter report today.

Lines in front of this AT&T store in New York during last week's iPhone launch. Maggie Reardon/CNET)

AT&T quick to brag
AT&T, at least initially, appears to have retained its initial leadership position when it was the exclusive provider of the iPhone. The company said yesterday that it activated 1 million iPhone 4S handsets in just the first five days since its launch last Friday.

It also activated 2.7 million iPhones in the third quarter , roughly half the amount from a year ago, when the iPhone 4 first launched. The results were also helped by the availability of the $49 iPhone 3GS, which de la Vega said was also a hot item for budget-conscious consumers.

Still, that's better than the 2 million iPhone 4 handsets Verizon activated in the quarter. Unlike AT&T, the carrier has been reluctant to provide specific figures for the iPhone 4S.

"I'm not going to get into volumes, it's too early in the quarter as to how many phones I'll potentially sell," Shammo said.

Apple itself set the tone for dampened expectations when it reported a decline in iPhone sales for its fiscal fourth quarter . As with AT&T and Verizon, it is expecting a strong rebound, and said it sold 4 million iPhones over the weekend .

Mixed third-quarter results
It's impressive that a single product can have such an effect on the two largest telecommunications companies in the country.

Verizon, for instance, reported a net gain of 882,000 contract customers, below the 1 million mark Wall Street had projected. At the beginning of the year, executives, emboldened by the prospect of getting the iPhone, said the company expected half of its contract customer base to use a smartphone. It expected a strong second half powered by a new iPhone.

But with the iPhone 4S coming out so late, and Verizon managing to put smartphones in the hands of 37 percent of its base, the company is unlikely to reach its goal.

"Even if penetration gains accelerate sharply in the fourth quarter with the iPhone 4S, the 50 percent milestone is still a long ways off," said Craig Moffett, an analyst at Sanford C. Bernstein & Co.

AT&T, meanwhile, reported 319,000 net new contract customers, roughly inline with expectations. But analysts pointed to the tepid growth in its average revenue per user, which grew just 1.4 percent over a year ago. De la Vega said he expected the metric to rise to 2 percent growth in the fourth quarter with more iPhone users in the base.

Three-way battle
While iPhone sales are expected to surge in the fourth quarter, it's unclear just how many customers will jump ship to another carrier. AT&T, Verizon, and Sprint Nextel all offer the device, reducing the need for a person to switch service providers. A fourth carrier, regional player C Spire, will also be getting the iPhone 4S in the coming weeks.

The only carrier left out is T-Mobile USA , which has been attempting to shore up its position with less expensive plans and a wider assortment of smartphones.

The carriers are expected to sell a majority of their iPhone stock to existing customers, which makes for an expensive upgrade. Verizon has sold 80 percent of its iPhones to current subscribers, with the rest coming from new customers, Shammo said, adding he expects that ratio to continue.

"The strong upgrade trends will pressure fourth-quarter margins," said Phil Cusick, an analyst at J.P. Morgan.

The carriers all pay a handsome subsidy to Apple--the highest in the industry--to carry the iPhone, so the higher the activation numbers, the larger the immediate financial hit.

The carriers have been willing to pay that price because it leads to more loyal customers willing to pay a higher monthly bill.

A better picture of what the fourth quarter could look like may be gleaned from Sprint Nextel, which reports its third-quarter results next week.

Either way, expectations are high for all carriers to boast of a happy holiday thanks to the iPhone.

 

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