Apple's AT&T Deal: Costly

18 Feb 10:14am
Posted by ToddSullivan
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The latest estimates have "unlocked" iPhones costing Apple over $1 billion in lost revenue the next 3 years.

Apple's (AAPL) AT&T (T) tie-up in the US is for another 4 years meaning the company will continue to not realize monthly revenue, estimated at $120 annually per subscriber from phones "unlocked" for use on other carriers.

Aside from the lost revenue aspect, one can only guess at the numbers of phone that have not been sold to people not willing to switch cell phone carriers to AT&T. Apple has stood by its "10 million phones sold by the end of 2008" goal but recent news that they have dramatically cut back on component orders can only mean sales growth has slowed.

I did a post in May of last year that said AT&T would be the big winner of the iPhone deal and to date they have been. What Apple did was delay sales of its product and allow other handset makers and carriers to come out with competing products. Now, Apple fans will say the offering from Verizon (VZ) and sprint (S) are nowhere near the quality of Apple's and that may be true.

What is true is that they have given their consumers an option the Apple to stem the urge to switch. When you also consider we have not seen what Research in Motion (RIMM), the Blackberry maker and clear "smart phone" leader has planned, Apple may face even more headwinds. When you can buy a Blackberry from every cell phone provider in existence, sales of the products ought to continue to outpace the iPhone.

None of this even takes into account the specter of Google's (GOOG) gPhone expected later this year.

Apple had a chance to "bum rush" the industry with its product and could have caught all the other handset makers and carriers by surprise. Whether it was greed, control issues or hubris, Jobs instead backhanded the industry with his rhetoric and attitude towards it.

Instead of having a product all carriers were glad to carry and sell, he created an atmosphere in which they embarked on a quest to compete directly with him and his product.

The handset game is hard enough without intentionally making enemies of its participants, Jobs has done this. I think Apple devotees may find themselves in the future wondering "what could have been" if only Jobs had not started out this process so adversarially.

Disclosure ("none" means no position):Sold Apple July $280 calls when stock at $165 in January, none in others

Todd Sullivan's- ValuePlays

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About

ToddSullivan

A Massachusetts based value investor, I look for companies whose current valuation is at a discount to their true value. When I purchase a stock, my typical holding period is several years. I consider buying a stock purchasing a piece of a business. I am confident once I make a decision to buy that eventually the market as a whole will recognize the true value of the business and value it accordingly. It may take 1 month, 6 months or a year, but if I buy it at enough of a discount to its true value my results will be (and have been) superior to the market as a whole. Of all the disparate investing disciplines, value investing has stood the test of time. The great investors of have all been value investors. Warren Buffett, Ben Graham, Bill Ruane (Sequoia Fund), Bill Miller and Wally Weitz, all have consistently outperformed the market for decades by using various forms of value investing. Currently I am a contributing writer to Seeking Alpha, Vinvesting.com, The Stock Masters and Value Investing News. Posts have been reprinted in The Wall St. Journal, Yahoo Finance, Google Alerts, Google Finance, TheStreet.com. 24/7 Wall St. and Topix.net.

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