Wednesday, 20 April 2011 08:48

AT&T's Q1 Record Results Show That There Is More Money In Android Than There Ever Was In Apple: How Do You Compete With Less Than Free?

In support of my post, ", as well as "My Thoughts on Roger McNamee’s View of Google and Mobile Computing", I bring you news that "AT&T Earnings Solid Despite Loss of iPhone Rights".  From CNBC:

AT&T posted record first-quarter subscriber growth, despite giving up exclusive US rights to sell the iPhone.

This statement is quite, quite telling. With all of the brouhaha over the iPhone, the quarter that AT&T loses exclusivity was also (coincidentally of course, for since Apple is the best thing in the whole wide world AT&T's record performance was due to the surge in superior iPhone screen protectors for the legacy customers). Realistically, AT&T's results illustrate the power of Google's "significantly cheaper than free" business model as well as demonstrates how accurate I was in challenging Roger McNamee’s View of Google and Mobile Computing. Mr. McNamee said that no one is making money with Android. Samsung, LG, HTC, Motorola, Sprint, T-Mobile, Verizon and AT&T beg to differ. Witness HTC's "no money" on Android:

You see, Android is a money printing machine, and those who don't jump on the Android bandwagon will get steamrolled by those who do. For those who do not recognize the "significantly less than free" pricing scheme, not only does Google offer what is arguably the best mobile OS available for free, complete with updates and potential for customization, Google also shares ad revenue and app revenue. Thus, you not only get one of the, if not the, best mobile OS for free, you get paid for getting it for free. A rather hard proposal to bypass. Even harder if all of your competitors are doing it, for they now have a significantly higher margin cushion than you would have if you didn't get assimilated by the Android/Borg.

The company posted earnings of 57 cents a share, narrowly topping Wall Street expectations, on net income of $3.4 billion. That compares to 41 cents a share and $2.5 billion from the same quarter in 2010. Revenue rose 2.3 percent to $31.2 billion. ... "We delivered another robust mobile broadband growth quarter for a very solid start to the year," Randall Stephenson, AT&T chairman and chief executive officer, said in a statement.

Though AT&T now must share rights to the Apple iPhone with Verizon, it saw a 10.2 percent growth in revenues, including an 8.6 percent increase in wireless service revenues. It marked the company's best-ever first quarter increase in total subscribers, which rose 2 million to 97.5 million total.

The company also saw its best first-quarter smartphone sales, with more than 5.5 million units sold, and an increase of one million annualized in iPhone activations.

What does this do to Apple's negotiating leverage when companies make more money by losing Apple exclusivity? Most people do not realize that Google's coup is not creating a slick OS, it is creating a virtually unassailable business model. A business model that was literally cherry-picked to take on the Apple closed-OS business model.

As you can see, AT&T has sold a LOT of high end Android phones last quarter, as well as mid-level and low and phones - and their customers LOVE them. Just note the ratings for each one:

Subscribers, see the Google forensic report (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional)).

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Last modified on Wednesday, 20 April 2011 08:48

11 comments

  • Comment Link James N Thursday, 12 May 2011 14:45 posted by James N

    Android is not free. HTC has to pay license fee to Microsoft for IPs, used in Android. The same goes for all other OEMs using Android unless they want Microsoft drags them to court. AT&T does not give up exclusive right to sell iPhone; it is Apple terminate the exclusive right. Until Google makes real money with Android instead of search-ads; Android still remain a big unknown and high risk in liability for vendors who adopted it.

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  • Comment Link Reggie Middleton Thursday, 21 April 2011 11:20 posted by Reggie Middleton

    You are missing an important point. Who controls the market is the win, not which grew earnings fastest to the point of market control. If android takes over the market, it will collapse Apples earnings growth.

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  • Comment Link Joe Thursday, 21 April 2011 10:58 posted by Joe

    Oh I didn't realize you think it would take 4 - 10 quarters for GOOG to catch up to AAPL in earnings growth. That seems like that could be a long time from now, just for google to stop losing more ground on earnings growth to apple, let alone make up the big difference that's already been created over the last three years.

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  • Comment Link Reggie Middleton Thursday, 21 April 2011 04:48 posted by Reggie Middleton

    I'm not making recommendations on stock, I'm just commenting on the monetizing potential of pushing the iPhone vs Android. Unless it was explicitly forbidden in the contract with Apple, AT&T would have been much better off carrying the higher end Android phones and marketing them hard way before their exclusivity with the iPhone ended. You see the result with just one quarter of effort. By being late to jump into the fray with both feet, they have allowed Verizon to take pole position in this high end market, and have allowed Sprint to come back from the dead (Sprint's release of the Evo has literally saved them as the Evo was arguably the best of the high end Androids last year).

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  • Comment Link Reggie Middleton Thursday, 21 April 2011 04:38 posted by Reggie Middleton

    Expect to see Apple follow Google's path and invest more monies into the business as this fight intensifies. Remember, if Google didn't significantly increase their investment into the business they would have blown out estimates as well.

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  • Comment Link Reggie Middleton Thursday, 21 April 2011 04:35 posted by Reggie Middleton

    It will happen when Android fully saturates the market. That is the point when Android and its hardware vendors will start competing solely on price and commoditize everything, potentially make core functionality ad driven - thus making it very difficult to charge for product. Basically, the same modus operandi Google has used in other sectors.

    The things that will prevent this from happening are:
    1) government intervention: this is quite possible, but may not happen in time to stop the Android takeover
    2) MSFT/Nokia combo taking a significant bite out of the Android/Google growth mechanism: This is a distinct possibility, for MSFT has the physical goods but up until now has been out ran by the management at Google and Apple.
    3) Apple's Cloud services allow it to catch up to Google's growth rates: Quite possible Apple will pull off a good product, but unlikely they can dent the Google business model. Less than free is one hell of a price tag.
    4) Some unknown factor comes and blows up everything: You never know what will happen these days. the next bill gates or steve jobs is out there somewhere.. Hell, it could even be me.

    The mistake that everyone is making is that they are looking at what is happening now, versus what will likely happen in the future. Apple is minting money because it strategically positioned itself squarely, and more importantly, first in key markets which it craftily reinvented and market like hell to exploit them. It worked very well and they have been effectively without competition, thus literally soaking up all demand there was to have in each said market. Three approach to this was a closed, proprietary system - which made a lot of sense since it basically prevented any competitors from entering the field without totally recreating everything (ecosystem and all) and starting from scratch. This coupled with the fact that Apple seriously appears to be better at marketing and aesthetic design (which is basically and extension of marketing) than nearly all of their competitors didn't hurt either.

    What Google did, was to market a very creative product with literally negative costs directly to distributors, vendors and manufactuers. These are the entities that nearly everyone has to buy from. By making the cost negative, Google actually made it too expensive NOT to use Android since all of your competitors are using it thus padding their margins. It is an ingenious plan and it is very well suited to take on Apple. You see, it is very difficult to combat.

    That is why you see financial analysts and retail investors focusing on Apple as the empire builder, but those actual competitors in the industry (the real insiders) are astutely focused on taking out Google as public enemy number one. RIM has tried to make their new products Android compatible (not iOS compatible) and MSFT/Nokia have literally created a synthetic merger in order to stop Android and has publicly said that that task is job number one.

    I would say that within 4 to 10 quarters, at this rate of growth or even materially lower, Android will be the defacto mobile computing standard, and paying (out f pocket) for the coolest technology or the snazziest gadget may very well be a thing of the past. That is unless Google is stopped. Once Google becomes a standard, just follow the path that they took in the search engine and online ad space to see the revenues and profit projections.

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  • Comment Link conner Thursday, 21 April 2011 00:26 posted by conner

    So should I buy more AT&T stock or just hold what I already own?

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  • Comment Link Joe Wednesday, 20 April 2011 23:05 posted by Joe

    I didn't expect anything, up or down. I just enjoy following both companies. I know you're a big believer in GOOG over AAPL in regards to their future prospects, so when do you think google will post higher YoY earnings growth than apple in a quarter? Do you think it'll happen as soon as this year? Looking at this past quarter, apple grew eps 95% while google grew 27% so it seems like a big gap to make up. When do you think android will kick in and have google growing earnings faster than apple?

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  • Comment Link Reggie Middleton Wednesday, 20 April 2011 19:26 posted by Reggie Middleton

    SOLD 18.65 MM IPHONES IN Q2, UP 113%
    Be aware that Apple will not have that one time revenue boost in new iPhone subscribers next quarter as they did in this quarter. They will see some expired contract rollover and some of those waiting for the iPhone 5 but that will be a very, very competitive time considering the roster of Android hardware and software on tap.

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  • Comment Link Reggie Middleton Wednesday, 20 April 2011 19:20 posted by Reggie Middleton

    It's as was expected. Apple has powered through earnings, a slight drop in margin but nothing worth noting considering the near doubling of profit. Revenues doubled as well.

    They sold much less tablets than even the more pessimistic forecasts, as I have been been warning in my posts. The tablet space is going to be much more competitive when things heat up, and components will be harder to come by at the same time that feature sets will spike in capability expectations.

    They also warned on margin and revenue. I made clear margin would be an issue, the revenue warning is probably management low balling to beat next quarter. They may be doing that with margin guidance as well, but there is more than a grain of truth in it. Alas, the real competition will not come to the 3rd quarter anyway as Honeycomb is officially released.

    Verizon sell through looked like it helped iPhone shipments, albeit probably (not confirmed, but most likely true) at lower margins than previously through AT&T. In the meantime AT&T actually made more money without the iPhone exclusive by pushing Android, as everyone else has. The real challenge will be at the end of the year when those 2 year contracts get rolled over or expire. Will people get the iPhone 4, 5 or an Android. That Evo HD 3D and Samsung 8.7 mmm thick phone look to be more than serious competition for what will probably end up being the iPhone 4GS labeled as iPhone 5. Then again, most of the people that buy the iPhone aren't buying on capability or specs anyway, so the fade will not be noticeable in this cycle.

    The stock jumped, but didn't you expect that?

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  • Comment Link Joe Wednesday, 20 April 2011 19:03 posted by Joe

    Reggie,
    What are your thoughts on Aapl's earnings and the stock's jump in after-hours?

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