AT&T to Offer IPhone Without Contract for $400 More (Update4)

By Crayton Harrison

July 1 (Bloomberg) -- AT&T Inc., seeking a wider base of customers for Apple Inc.'s new iPhone, will offer the device without a service contract and instead make users who don't want a two-year commitment pay an additional $400 and get a month-to- month plan.

The pricing gives Dallas-based AT&T, the biggest U.S. mobile-phone carrier, a way to ensure that only people who sign longer contracts will get discounts on the new device, which runs on a speedier third-generation wireless network. The phone will be available July 11 at 8 a.m. for $199 with an AT&T contract.

The $599 price without a contract will be too much for many customers, persuading them to sign up for a subscription with AT&T instead, said Michael Gartenberg, an analyst at JupiterResearch in New York. That will help AT&T lower its customer turnover, keeping subscribers from switching to Verizon Wireless or Sprint Nextel Corp.

``There's a small minority of people who for whatever reason want the latest and greatest phone and don't want to be tied to the network for two years,'' Gartenberg said today in an interview. ``It's going to cost you quite a bit for the privilege of not signing a contract.''

Subsidy's Cost

AT&T plans to sacrifice 10 cents to 12 cents a share in earnings this year and next to subsidize the cost of the phone, making it available for half the price of the older version. Cupertino, California-based Apple plans to sell 10 million iPhones worldwide in 2008.

Apple rose $7.24, or 4.3 percent, to $174.68 at 4 p.m. New York time on the Nasdaq Stock Market. AT&T fell 39 cents to $33.30 in New York Stock Exchange composite trading.

AT&T and Apple revised their sales plans after some customers used software tricks to make the previous version of the device run on other networks.

An unlocked iPhone can run on T-Mobile USA Inc.'s network in the U.S. and on international networks that use the global system for mobile communications. The phone won't work on the networks of Verizon Wireless and Sprint because they use incompatible technology.

Unlike with the older model, customers won't be able to take the new iPhone home from the store without connecting it to AT&T's network, so even buyers of the no-contract phone will have to pay for some AT&T service. In the U.S., the device will only be available in AT&T and Apple stores, and not online as before. Service plans begin at $69.99 a month.

July Release

The iPhone will be available at the no-contract price sometime after July 11, AT&T said. The $199 price is available to new customers, people who purchased the previous iPhone model and current subscribers who have neared the end of their contracts, if they sign up for two more years of service.

By publicizing the unsubsidized price of the iPhone, AT&T can tell customers they're getting a $400 discount for signing the two-year contract, said Jennifer Fritzsche, an analyst at Wachovia Securities Inc. in Chicago. She expects AT&T shares to outperform the broader market.

``It's a marketing attempt by the company to get people in the door with the lure of no contracts,'' Fritzsche said. ``Given the exorbitant price they're charging without the contract, once they're in the door it's an easy sale.''

A version of the phone with additional storage will cost $299 with a contract for eligible customers and $699 without one, AT&T said. AT&T subscribers who already have a contract and aren't yet eligible for the discount can buy the iPhone for $399 or $499 -- depending on the model.

AT&T pays Apple up front for the devices it sells. The carrier pays a commission on phones sold in Apple's own retail outlets.

The new price details indicate Apple is getting about $550 for each iPhone AT&T subsidizes, up from an earlier estimate of $350, Ben Reitzes, a Lehman Brothers Holdings Inc. analyst in New York, said today in a note. The companies haven't disclosed how much AT&T is paying Apple.

To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net

Last Updated: July 1, 2008 17:08 EDT

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