Is AT&T an iPhone 5 Winner?

Since Apple (NASDAQ:AAPL) released the iPhone 5 for carriers AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint (NYSE:S) on September 21st, analysts have speculated which carrier would derive the most success from the smartphone.

According to data compiled by analyst firm ComScore, AT&T is currently dominating the U.S. market; the mobile carrier accounted for 68 percent of pre-orders during the first three days of the phone’s availability, followed by Verizon with 24 percent and Sprint with 8 percent. In contrast, during the first month of iPhone 4S sales, Verizon came out ahead with a 45 percent share to AT&T’s 43 percent.

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As the original carrier of the iPhone, part of AT&T’s initial success with the smartphone came from its existing customer base who upgraded from the iPhone 4. Regardless, the iPhone 5 has been the company’s fastest-selling iPhone to date according to a recent press release.

While AT&T has reported the strongest sales of the three carriers, the statistics do not show the smartphone’s hidden costs. It is the carrier, not the consumer, that bears the real cost of the phone. Carriers pay an Apple subsidy that some analysts believe may be as much as $400 to $425 per customer who signs up for a two-year service contract.

The iPhone has not been profitable for the leading wireless carriers over the short term and analysts predict the iPhone 5 will hurt AT&T’s margins for at least the first nine months of the contract. The release of the iPhone 4S in 2011 in part pushed the company’s operating profit margin from 29.5 percent in the third quarter to 15 percent in the fourth. AT&T has not given any indication of how the company expects the phone to affect profit margins, but during its third quarter conference call, Sprint management said its iPhone line will not be profitable for the company until 2015.

In almost direct contradiction of this logic, Ralph de la Vega, the president and CEO of mobility and consumer markets for AT&T, said in an interview with CNBC last week that the company profits more from iPhone sales because the company uses the smartphone as a means to sell other services like the home automation system Digital Life. Several weeks ago at the Goldman Sachs technology conference in New York, CEO Randall Stephenson said he believes AT&T will be able to report wireless profit margins of 40 percent in 2012.

Whether the iPhone will be profitable for any carrier, and AT&T in particular, depends on the number of iPhone activations that are new customers, the amount of data new iPhone 5 customers use and a low churn rate over the long-term.

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