Some have criticized AT&T’s increase in acquisition cost in 2008 especially when it picked up fewer net subscribers for dollars spent than it did in 2007.  However, 2007 was the year when it acquired massive number of low quality subscribers from prepaid.  With higher churn, lower ARPU, and intense competition, these prepaid subscribers can have a lifetime value 3-5x lower than an average postpaid subscriber.

Let’s look at the numbers more closely…..

AT&T spent $13B in 2007 for Selling, General, and Administrative expense vs. $14B.  So roughly the same.  However, in 2007 it picked up roughly 5.3M net additional subscribers while only 4.7M in 2008.  But of the 5.3M in 2007, one out of four were prepaid subscribers whereas in 2008 nearly all net adds were postpaid.

Not only were they postpaid subscribers, they were mostly iPhone postpaid subscribers that have a reportedly 1.6x ARPU than the average postpaid subscriber.  Extracting the numbers from the Investor Briefing, more than 50% of all postpaid gross adds where iPhones (1.9M out of the 3.5M total in postpaid) coupled with 60% of the net adds being smartphone subscribers……I would say the increase in acquisition cost was money well spent.  (I don’t buy the lower churn rate of iPhone subs yet since these subs have not been around long enough.)

But don’t iPhone subs cost more to acquire and it is hurting AT&T’s CPGA and bottom line as can be seen in the recent earnings??

Not true.  Despite the heavy acquisition cost for a iPhone sub as can be seen by the earnings shortfall at AT&T, in the long run, the residual value from higher iPhone ARPU and lower churn should justify the investment.  Assume that the iPhone is subsidized an additional $200 in CPGA. If ARPU was truly 1.6x higher than average postpaid ARPU, $60x.6 = $36.  $36 x 40% margin = $14.40 in additional gross contribution per month.  Hence, the breakeven point for the additional $200 in CPGA is a little more than 1 year ($200/14.40 = 14 months). This seems well worth the investment given that the subs are under a 2-year contract.

Related posts:

1. How to estimate AT&T Prepaid Subscribers, ARPU, and Churn
2. T-Mobile USA revenue jumps despite weak subscriber growth
3. Verizon and others losing market shares to AT&T

Tags: ARPU | AT&T | CPGA | Earnings | Postpaid | Prepaid

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