The record 5.2 million iPhones that AT&T reported activating in the third quarter only highlighted the company's reliance on the Apple smartphone as it faces losing exclusive distribution of the device next year.
Nearly a quarter of the iPhones sold in the period were to new subscribers, helping to drive a total of 745,000 net new wireless customers -- up 50% from a year ago. The 2.6 million subscribers added -- both contract and prepaid -- were the most ever for the third quarter. AT&T's wireless business increased 11.4% from a year ago.
But the days of AT&T posting gaudy iPhone numbers and wireless subscriber gains may be coming to an end with Verizon Wireless expected to begin selling the device early next year. A study by Credit Suisse last month estimated that AT&T would lose 1.4 million iPhone customers to Verizon if its rival was to offer the Apple handset. But only a small proportion would break their contracts to switch.
The iPhone accounted for two-thirds of the 8 million smartphones overall that AT&T activated in the third quarter. In anticipation of its exclusive iPhone deal ending, the carrier has been broadening its smartphone lineup, adding Android-based devices, BlackBerry models and most recently, a trio of new phones powered by Microsoft's Windows Phone 7 platform.
During AT&T's earnings conference call Thursday, AT&T Mobility head Ralph de la Vega emphasized the growing competition the iPhone faces and how the company is trying to capitalize on the exploding smartphone market.
"So I think it will be a race of innovation to see who can develop the most innovative products and services," he said. "And the thing that I liked about our position is we believe in having a wide choice of OSs, having every single major one."
In other words, instead of simply riding the iPhone's popularity, AT&T is diversifying its portfolio of phones. With Android devices in particular outselling the iPhone in the last six months, according to Nielsen, that strategy makes sense. But with the company losing sole rights to sell the iPhone, it has little choice but to place its bets more widely.
Beyond smartphones, AT&T has also touted the continued growth of subscriptions linked to connected devices such as e-readers, tablets, GPS devices and security systems. That emerging category added 1.2 million customers in the third quarter. "This is a terrific business for us -- lower ARPUs, but higher margins and low churn, and we're still in the starting blocks with this terrific opportunity," said de la Vega.
But AT&T also has competition on that front, with Verizon last week announcing it would begin selling a Wi-Fi iPad at retail locations with data plans starting at 1GB for $20 a month.
How well AT&T can compensate for losing iPhone exclusivity will hinge partly on the success of the Windows Phone 7 devices, which the carrier is strongly supporting. Early reviews of the platform have been mostly positive, although influential tech reviewer Walt Mossberg of The Wall Street Journal said this week it was inferior to the iPhone and Android. AT&T can only hope that Windows Phone 7 models prove more popular than Microsoft's ill-fated Kin phones.