When AT&T entered into an exclusive arrangement with Apple to support its iPhone in the American markets, it was considered an extremely beneficial deal for the cellphone carrier. And this belief was reinforced when the iPhone and its successor, the iPhone 3G, notched up record sales.

However, the popularity of the device has now come back to singe the company's profits. (See: Apple, AT&T sell 1 million new iPhones in 3 days; users download 10 million applications)

In order to subsidise the iPhone, AT&T had to pay Apple a substantial amount for each device sold, in exchange for, service usage by customers, who would pay AT&T for these services. AT&T had hoped such usage by customers over an extended period of time, would help it recoup what it had paid Apple, and make a tidy profit, as well.

Now, AT&T has found out that it has had to pay out an enormous amount this quarter for the privilege of the iPhone partnership, $900 million to be precise.

This has raised concerns whether AT&T can make profits from the two-year contracts iPhone users in the US are tied to. The company on Wednesday reported adjusted third quarter earnings of 67 cents a share, four cents below Wall Street estimates. What's notable is the reason AT&T fell short of its targets: The adjusted figure includes a 10 cents a share hit for iPhone 3G subsidies. To put that into perspective AT&T took a $145 million, or 2 cents a share, hit due to costs related to hurricanes.

While neither company is wholly dependent on the iPhone for revenue, the device does influence stock performance. And it appears Apple got the better end of the deal. Since the debut of the original iPhone in June 2007, AT&T shares have fallen by 37.6 per cent. Apple stock has fallen 19.1 per cent.

iPhone customers accounted for 25 per cent of all new AT&T customers added last quarter. Being tied to one device is a major risk given the mercurial nature of consumers. Even a product as popular as the iPhone could fall out of favor with tech enthusiasts. The Motorola Razr was once a coveted device for a couple of years before it began its downward spiral.

Apple can point to the continued success of the iPod line as an example of its longevity. But the iPod has few worthy competitors, while the iPhone faces a major test this holiday season. The Google G1 phone and Research in Motion's Blackberry Bold and Storm all could give the iPhone a run for its money, along with Nokia's Tube. (See: How does Nokia's Tube measure up against Apple's iPhone? and Android operating system to power Google's first mobile handset, G1)

However, the company brushed aside such concerns. In its statement, AT&T noted, ''AT&T is optimistic regarding continued strong iPhone 3G activations and is confident in the long-term value created by this investment in acquiring high-value, data-centric wireless subscribers.''
Randall Stephenson, AT&T chairman and chief executive officer, added, ''The new customers we're winning are high-value, with attractive revenue and churn profiles. We're expanding the market, as users adopt more data and media-rich services and access a wide array of applications. These achievements are positive for the future of our business.''
Only time and revenue figures will tell whether this was a wining move by AT&T. (See: The iPhone effect: smartphones get smarter)