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Why AT&T May Deep-Discount the iPhone
Posted on: May 1, 2008
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Why AT&T May Deep-Discount the iPhone: “With competitive pressures mounting, the phone company may cut the iPhone’s price to boost demand—and cement its relationship with Apple”
The big thing about the next iPhone was supposed to high-speed Internet access and tools for business. Instead, it’s looking like iPhone 2.0 is all about price and that ever-awkward relationship between Apple and AT&T.
With less than two months to go before Steve Jobs takes the stage at Apple’s Worldwide Developers Conference, where he’s expected to unveil a new iPhone, it appears that AT&T may not be convinced that new bells and whistles will be enough to get droves of new customers to switch from other wireless carriers. So after a year of charting a new wireless business model by selling the vaunted iPhone at premium prices, the nation’s biggest phone company may resort to the oldest trick in the cellular book: big discounts.
Although it has sent millions of new customers AT&T’s way, this unique market advantage known as the iPhone will only last so long. With every passing month, rival device makers are introducing new handhelds that attempt to replicate the wide array of innovations—starting with sheer simplicity—that Apple (AAPL) used to rock the wireless world less than a year ago. None of these new phones has duplicated Apple’s formula for success yet, but it may be only a matter of time.
Stimulating Demand
Published reports that first appeared on the Web site of Fortune Magazine suggest that AT&T (T), which has an exclusive five-year deal to sell the iPhone in the U.S., is prepared to subsidize the device by as much as $200, slicing the purchase price as low as $199 for customers who sign a two-year service contract. Apple and AT&T declined to comment on the matter.
Such a discount could cause a surge in demand. At last count, Apple had sold some 5.4 million units, the vast majority of them for AT&T’s network, even with price tags of $400 to $600—essentially unheard of in the U.S. cellular market. Impressively, AT&T says 40% of its iPhone users are new customers. Yet with rival smartphones like Research In Motion’s (RIMM) BlackBerry and a new Palm (PALM) Treo selling for as little at $99 at some carriers, competitive pressures are building.
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Visa Inc., the largest payment-card network, set a record for U.S. initial public offerings today by raising $17.9 billion, more than expected.
Underwriters sold 406 million shares of San Francisco-based Visa for $44 each, above the expected range of $37 to $42 each, according to Bloomberg data. That values the entire company at $42.5 billion, compared with $27.6 billion at rival MasterCard Inc., the industry’s second-largest company. The stock begins New York Stock Exchange trading tomorrow under the ticker “V.”
Chief Executive Officer Joseph Saunders is pressing ahead with the sale amid the worst market for IPOs since 2001. Demand for new shares has waned this year, with 133 companies raising $16 billion as of yesterday, 47 percent less than in the same period last year, according to data compiled by Bloomberg.
The IPO eclipses AT&T Wireless Group’s $10.6 billion stock offering in 2000 and ranks second in the world after the $22 billion debut in 2006 of Industrial & Commercial Bank of China Ltd.
Visa and MasterCard have benefited as consumers pay for more purchases with credit and debit cards instead of cash. Cards will be used for 55 percent of all U.S. transactions by 2011, rising from 40 percent in 2005, according to the Nilson Report, an industry newsletter based in Carpinteria, California.
Visa’s profit doubled to $424 million in the quarter ended Dec. 31. Revenue surged 76 percent to $1.49 billion.
Visa and MasterCard, which is based in Purchase, New York, are insulated from rising defaults and late payments because, unlike American Express Co. and Discover Financial Services, they don’t extend credit to cardholders. Banks that issue the cards take the credit risk.
The Visa share sale was managed by JPMorgan Chase & Co. and Goldman Sachs Group Inc. with assistance from 13 firms including Bank of America Corp. and Citigroup Inc.
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