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Tuesday, May 08, 2007, 07:00 am PT (10:00 am ET)

AT&T not planning to subsidize iPhone?

Wireless carrier AT&T is looking to use next month's launch of iPhone as an important branding opportunity, but now appears unlikely to offer subsidies on the Apple handset, according to comments made during a recent AT&T investor gathering.

"There was a major focus on the launch of the iPhone, expected in late June (based on Apple’s latest comments)," John Hodulik, an analyst with UBS, wrote in a report following the financial meeting. "While the company would not answer the vast majority of our questions, we were able to infer a couple of new data points."

First off, said Hodulik, AT&T indicated that it plans to use the iPhone launch "as a branding event" and that it will also increase its advertising dollars around the product to cement the "AT&T Mobility" name in the market. The No. 1 U.S. wireless carrier added that it expects Apple to market the product aggressively through its own avenues, as well.

"We expect the wireless market to see increased competitive pressure with the
launch of the iPhone," wrote Hodulik. "Meanwhile, the company will increase advertising and handset subsidies on non-Apple phones to take back postpaid gross add share lost in [the first quarter].

At the same time, however, the UBS analyst said comments made by AT&T management led him to believe the carrier will not subsidize the cost of Apple handsets, as has been widely rumored over past few months.

"In fact, AT&T may generate a small margin on sales of the [iPhone] in its stores," he wrote.

Hodulik add that, "Management would make no comments [sic] on how the phone is activated in its own or Apple owned stores, suggesting that this may be done somewhat differently versus typical handset purchases."

Overall, the analyst said he walked away from the meeting believing that AT&T's revenue share with Apple could be a more meaningful portion of monthly average revenue per user than previously thought. He explained that this is possible given the "significantly better economics" AT&T should realize from iPhone subscribers, given the lower "churn" and cost of adding each user to its network with advertising and branding help from Apple.

"The main concern was the impact of a generous revenue share could have if a large number of iPhone subscribers were existing AT&T Mobility customers," wrote Hodulik. "While giving no details, management suggested this had been contemplated, leading us to believe that the revenue share changes based on whether the customer is a new or upgraded subscriber or that the economics are adjusted based on the actual numbers of each."

Lastly, the UBS analyst said, AT&T expects the Apple phone to help drive traffic into its stores where it will increasingly sell wireline products along side its wireless services.