For AT&T, smartphones are a gateway drug

AT&T activated 3.6 million iPhonesduring the second quarter, a respectable number and 60 percent of its overall smartphone sales, despite Verizons having reportedly enjoyed a solid quarter also offering the device. Android and BlackBerry devices made up the remaining 40 percent of Ma Bells smartphone sales, which composed nearly 70 percent of AT&Ts devices sold under contract. Those high-end, data-sucking handsets are also generating more money for AT&T in other ways such as increasing both usage and revenues for texting and MMS.

According to AT&T, almost 50 percent of its 68.4 million contract customers have smartphones, and given the rapid adoption of the devices, this percentage is set to keep rising (it was at 35.8 percent a year ago). And those smartphone users helped drive AT&Ts $15.6 billion in wireless revenue up 9.5 percent from a year ago. They also consume more services, leading to an average revenue per user of 1.8 times that of customers using feature phones.

The clearest examples of how smartphones are boosting older business lines are the almost 210 percent increase in monthly data plans sold from the same quarter a year ago and the boost in text and MMS (picture) messaging. Total text messages carried on the AT&T network increased by 24 percent to 190.8 billion, and multimedia messages increased by 54 percent to 4.0 billion year over year.

This may seem counterintuitive given that many Internet services can help consumers avoid texting plans or the need to send pictures via MMS. For example, using Google Voice, all t! exts cou ld be sent via IP without ever using the carriers native texting function, or someone could take their photos and send them up to Facebook or even via email, avoiding the MMS charges. But apps with integrated texting notifications or functions and smartphones with better cameras are making the use of these services easier and intuitive.

And in an example of how providing people with Internet access encourages them to use more services in general, it appears that smartphones are driving subscriptions for family plans, as more than 85 percent of smartphone subscribers are on AT&Ts FamilyTalk or business plans. Since families cant share data plans, my hunch is those plans are an effort to share voice and messaging costs as more family members move up to smartphones with costly data plans. People who have smartphones also tend to stick with AT&T, although that might also be because of the $350 early-termination feesassociated with the devices bought on contract.

But while the boost in revenue and usage could be seen as a plus, shareholders and AT&T will likely point to the fact that all this extra money still isnt making up for AT&Ts need to spend on infrastructure to support the growth in data. Indeed, the carrier boosted its plans to spend on network improvements from $19 billion to $20 billion and pointed out that while wireless operating income was up 2.3 percent, expenses associated with the business were up 12.5 percent. Presumably the capital expenses will decrease over time once AT&T rolls out its 4G LTE network something its in the middle of right now. AT&Ts operating margins on the wireless side are down but still healthy at 27 percent.

So for AT&T, the network that first experienced the iPhone effect, smartphones have both increased the revenue opportunity but also hastened the investment cycle as people used the services their phones provided. The question for c! arriers is whether or not data usage keeps rising in line with the need to spend money on the network. If it does, then smartphones may become the gateway drug that help take down their dealer.

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