iPhone Curveball Thrown at AT&T

Friday, March 26th, 2010

Since its introduction in 2007, Apple’s iPhone has been the driving force behind AT&T’s domination of the smart phone business in the United States. If a consumer wanted an iPhone, he or she had to sign up with AT&T.

The success of the combined effort has been somewhat marred by constant consumer complaints about the poor quality of AT&T’s service in a number of major metropolitan areas, most notably New York City.

With the pending release of its iPad seeming to dominate the media attention, stories suddenly began leaking that Apple will soon be offering a version of the popular mobile communications device that works on CDMA networks, like that which is used by Verizon. The news has to have been a disturbing curveball for AT&T.

For AT&T, the Apple relationship has been crucial, helping to make the carrier the U.S. leader in lucrative smart-phone market share. According to comScore Inc., AT&T has over 43% of all U.S. smart-phone customers, compared with 23% for Verizon. These customers are especially attractive because they generally pay higher monthly rates for data plans.

For several quarters, AT&T’s growth has come almost single-handedly from the iPhone. In the fourth quarter of 2009, the carrier said it activated 3.1 million new iPhones. In comparison, it counted only a net total of 2.7 million new subscribers as some customers moved from other phones to iPhones.

“You’re not going to lose the iPhone [exclusivity] and make up growth somewhere else without bearing the cost,” said Sanford C. Bernstein & Co. research analyst Craig Moffett.

—The Wall Street Journal, New iPhone Could End AT&T’s U.S. Monopoly

It will be interesting to see how AT&T responds to this curveball. According to reports it has been working overtime to improve its service to be a in a better position to compete when its exclusive deal with Apple runs out.

In mid-December, AT&T executives set up a 100-day plan to dramatically improve the company’s network in densely-populated cities, according to people familiar with the plan. Since then, AT&T has added new network spectrum to better handle traffic, repositioned antennas to improve reception in office towers and wired more neighborhood cell towers with faster connections.

—The Wall Street Journal, AT&T Prepares Network For Battle

But as AT&T prepares its response to the looming curveball, its competitors might do well to watch out for curveballs of their own.

AT&T “is managing volumes that no one else has experienced,” said John Donovan, the company’s chief technology officer. It has improved service in big-city markets and expects “continued improvement in those markets in the coming months,” he said.

For example, AT&T said when iPhone customers started checking their email and surfing the Web from their high-rise offices, AT&T repositioned its cellular antennas to point up, instead of down. Rivals will start the process of making the same changes only after the phones hit their networks, it said.

The iPhone taught AT&T other lessons its rivals will discover through customer trial-and-error. Before the iPhone, it used to be able to accurately forecast to the minute the type of phone usage each new customer would add to its network based on basic demographics such as age and income levels. The forecast always held true across cities and towns.

—The Wall Street Journal, AT&T Prepares Network For Battle

With the increasing pace of change and the consumer’s ever growing demand for more and better features as well as performance, the smart phone business looks like it will be the scene for many years’ worth of unexpected changes.

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