AT&T Hikes Early Termination Fee to Retain iPhone Subscribers

AT&T (NYSE:T) is expected to increase the early termination fee (ETF) associated with the mobile plans for its new and existing smartphone subscribers starting June 2010 from $175 to $325.  Although AT&T has not specifically associated the ETF raise with any particular device, we believe that the fee hike can help the company reduce potential iPhone subscriber losses to Verizon (NYSE:VZ) when Apple’s (NASDAQ:AAPL) iPhone exclusivity in the US ends.

Below we discuss the importance of the iPhone subscriber base to AT&T, and how this move will help AT&T retain more of its iPhone customers.

15% of AT&T’s Wireless Subscribers Use iPhone, Contribute 25% to Wireless Revenues

AT&T had more than 6 million new iPhone activations during the second half of 2009.  The company has gained significant US mobile subscriber market share in recent years due to its exclusive rights to sell the iPhone in the US.

We estimate that AT&T currently has about 13 million iPhone subscribers, which account for nearly 15% of AT&T’s wireless subscriber base. With an estimated average revenue per user (ARPU) of $90-$95 per month for the iPhone, these subscribers generate around 25% of AT&T’s overall wireless revenues.  This suggests that AT&T will make significant efforts to retain this valuable customer base.

High ETF Can Deter iPhone Subscribers from Discontinuing AT&T’s Services; Retain ARPU Growth

Apple’s new version of the iPhone is expected to be released in June 2010.  In addition to new customers buying the iPhone, we expect a significant portion of existing iPhone subscribers to upgrade their device.

Both new as well as existing customers will need to subscribe to a two-year contract with AT&T, which still holds exclusivity to sell the iPhone. This should help AT&T effectively secure its subscriber base as a high early termination fee will deter subscribers from shifting to Verizon when iPhone exclusivity ends.

AT&T’s iPhone users who wish to migrate to a different service provider yet retain their iPhones will have to 1) withhold their upgrade and renewal or 2) pay an ETF of $325.  The move to raise the ETF will therefore help AT&T minimize subscriber losses in the event of the iPhone exclusivity loss and sustain high data ARPU (average monthly revenue per user) growth.

Below you can see how AT&T’s stock price may be affected if its data ARPU growth were to slow down as a result of the loss of iPhone exclusivity.

You can see our complete model for AT&T’s stock here.