AT&T iPhone Exclusivity Hangs on App Store Profits

iPhone App Store
According to Morgan Stanley analyst Kathryn Huberty, ending Apple's infamously exclusive relationship with AT&T could double iPhone sales.

Huberty's unsurprising prediction seems to suggest that Apple would be foolish to not end its exclusive deal with AT&T since to do so would bolster sales. What's not so obvious is that a jump in sales doesn't necessarily correspond to a jump in profitability. The deciding factor for Apple in making the leap is more likely to hinge on the increasing profitability of the App Store than simply selling more phones.

Apple has never been interested in simply moving product. Apple is focused on positioning and profitability. It caters to the needs of the most profitable demographics. By funneling the iPhone through a single carrier, AT&T, Apple has been able to extract a premium from that carrier's service fees. While the official numbers aren't public, it's easy to ascertain that when a second US iPhone carrier is introduced, AT&T will discontinue kicking back to Apple the kind of premiums they've been willing to pay for exclusive rights to the iPhone.

AT&T has been smart to offer Apple a sweetheart of a deal. For years, the number of people flocking to AT&T simply to have an iPhone has been a boon to the telecomm giant's bottom line. It's in AT&T's interest to keep this deal going. I shutter at what will happen to its customer base the day an additional carrier or two is added.

The App Store has changed things in a big way since the original deal was inked. While only Apple knows just how much income it's earning from the over two billion Apps downloaded from the App store, its impossible to ignore that the 30 percent is skims from each paid app is going to add up to a big pile of pennies.

While Apple makes a handsome profit from each iPhone sold, sticking exclusively with AT&T limits the number of iPhones in people's hands. That, in turn, limits the number of purchases from the App Store, a fact that you can be sure Apple is keenly aware of.

The turning point for the Apple/AT&T deal is going to be the day that Apple loses out on more income from the App store than it gains by going steady with AT&T. Considering the avalanche of momentum the App store is gaining in Apple's quest for mobile computing dominance, its hard not to see that the time to start shorting AT&T stock is near.

Michael Scalisi is an IT manager based in Alameda, CA.

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