Reports are suggesting that AT&T (NYSE: T) may be considering cutting the iPhone’s monthly service plan by $10 to make the phone appeal to a wider more price-sensitive audience. Such a move would be great for consumers, but we wonder what the financial impact would be to AT&T, which already heavily subsidizes the phone?
Cote Collaborative analyst Michael Cote, an industry pricing strategist, says there is a “strong possibility” that AT&T will drop the minimum voice and data plan from $69 a month to $59 a month at Apple’s World Wide Developers Conference in June, according to The Street (via MacRumors). To be sure, AT&T is likely considering everything at this point. It is fighting hard to keep its exclusivity arrangement with Apple (NSDQ: AAPL), which is set to expire next year. A price cut would be an easy way to boost iPhone sales, which in turn, could make Apple very happy. Cote theorizes that the price is becoming a major concern for Apple, especially at discount retailers, like Wal-Mart (NYSE: WMT), where sales haven’t met expectations.
But can AT&T afford the cut? What we think, after the jump.
There’s no easy answer to this question, without knowing AT&T’s profit margin. But using some basic back-of-the napkin estimates, it’s easy to assume that yes it can afford it — however, not without trimming margins by around 14 percent. Here’s the math: a two-year contract costs a minimum of $1,656. After the $10 cut, the contract would be worth $1,416, or 14 percent less. Still, at those prices, it likely far exceeds how much AT&T pays for each phone (of course, it also has to pay for the network). The problem is that AT&T has no way to upsell users, except by selling more voice minutes or text messages because Apple makes all of the money from application and content sales. One option is for AT&T to agree to the price drop, but then to build iPhone applications of its own to make more money off the platform.