AT&T loves iPhone, but...

The WSJ Wednesday ran an interview with AT&T CEO Randall Stephenson that emphasizes the company’s desire to push more aggressively into wireless.

The article estimated that the iPhone 3G brought 1.7 million new customers to AT&T Wireless in 2008. Because of that success, Stephenson is seeking to extend expiration of its US exclusive on the iPhone from 2010 (presumably June 2010) to 2011.

The free side of the WSJ website includes a few interesting tidbits, including Stephenson being keen on Cisco telepresence (as a substitute for air travel) and the inevitable decline of its wireline business.

Two of the interesting tidbits are on the iPhone and expansion of the Cingular AT&T Wireless network:

Apple: AT&T engineers privately chafed at being blamed by bloggers and some industry watchers for early problems with the iPhone 3G that led to dropped calls. It turned out to be an issue mostly related to Apple’s operating software and hardware and was addressed through software updates. Neither side publicly cast blame on the other, and Mr. Stephenson says the relationship is strong. “Any relationships as tight as this one, they require hard work at the most senior levels,” he said.

Wireless networks: He said the challenge of increasing network capacity isn’t just about cell towers, but also about beefing up the “backhaul” trunks that carry data back from those sites underground. He says AT&T will build a fourth-generation LTE network in the 2011-2012 time frame. “There’s no panic or rush to get there,” he said, because the highest-bandwidth wireless applications, like high-definition video streaming, are still a ways off. “It’s about having capacity for the applications users actually want now.”

Replacing subsidies with something worse?

For decades, the US cellphone operators have been addicted to handset subsidies. Like crack addicts, they know they should stop but they can’t. It’s a form of prisoner’s dilemma — it would be great if they all agreed to end them, but none want to make this move alone.

The good aspect of subsidies is they reduce the sticker price of handsets (typically by $200), spurring adoption of more capable phones. The bad aspects of subsidies are that they raise the cost of wireless service (to reclaim the subsidy) and mean that most users are on some form of contract, making it unlikely they’ll do anything about a new phone (or new carrier) for two years. The only exception to the two year lock-in is if consumers pay an “early termination fee” to recoup the subsidy.

More seriously, in Europe (where subsidies never caught on), consumers buy often phones independent of service. (Such third party sales in the US are estimated at less than 5%). This means a wide range of models and choices, which many in the industry believe encourages innovation. It certainly reduces the gatekeeper role that operators play in deciding what handsets consumers can and cannot have.

The transition could be wrenching. In Japan, where the government has been pushing to phase them out, they are blamed (rightly or wrongly) for declining sales this year. However, DoCoMo profits are up on the change, and more consumers have less expensive monthly plans.

Now, change may be coming from an unexpected source. As reported last week by the so-called “consumer” columnist in our local rag, cellphone subscribers who don’t like early termination fee are (as is common in California) taking it to court. Also as is common in the US, the case is being driven by lawyer greed, in hopes of winning class action status and pocketing millions (if not billions) in legal fees.

One such attorney has won the first round of such a case against Sprint, awarded (at least temporarily) $18 million class action damages for all California consumers. The decision is patently absurd, but given the next step is the wacky 9th Circuit Court of Appeals, who knows what will happen?

The most likely outcome is that early termination fees will be pro-rated, to match the payoff of the subsidy over time. This probably wouldn’t affect things much, other than to perhaps pull forward carrier switching by a few months. (It’s hard to see how any reading of the law could go further).

However, the new Obama administration is expected to create a more populist (i.e. interventionist) FCC. The FCC — as both rule-maker and rule-enforcer — gets to make up its own policies, and thus could conceivably ban early termination policies entirely. If so, handset subsidies would evaporate with the mechanism to pay them back.

For handset makers, this could provide an entree: those with innovative products that are underrespeented in the US (notably Nokia and Sony Ericsson) have the most to gain. Companies with weak recent offerings but strong US distirbution (Motorola, Palm) have the most to lose.

However, paying the full price of handsets, consumers would tend to favor cheap over expensive handsets. This could easily increase pressures towards commoditizing handsets, away from the $400-500 models like the iPhone and towards the mature, entry-level models like those from LG, Samsung and Sanyo. Companies at the high end of the market without entyr plevel phones (RIM, Apple) would be at risk, and presumably would be forced to offer a wide range of products (as Apple does today with the iPod) to keep consumer mindshare and market share.

The impact of banning subsidies would be even more traumatic for U.S. network operators, disrupting their standard business model of the past two decades.

Churn will certainly go up, and without contracts, carriers will face a dilemma of how to pay for their billions in advertising costs. (In its last full year of independent reporting, Verizon Wireless reported advertising expenditures of $1.2 billion in 2005). To cover handset costs, operators could look more like dealers, using handset exclusives — with healthy markups — to recover marketing costs. Will this eliminate most TV advertising — thus nullifying the economies of scale enjoyed by AT&T Wireless and Verizon Wireless? Or it will widen the gap between the Big Two and the also-rans?

Without subsidies, the overall tendency will be to blur the lines between prepaid and postpaid market. Both would favor cheaper handset models, but postpaid would offer cheaper buckets of minutes via bulk pricing.

It’s also possible (if however unlikely) that the new Congress or FCC would ban locking handsets to a carrier, as is (mostly) true in Europe. The issue was briefly a hot one when the iPhone first came up. Who knows, since the SCOTUS prefers European law to the US constitution, it could even happen via the courts.

The operators are hoping that the FCC will pre-empt state regulation to stop cases in state courts and the associated legal fees and potential damages. But the carriers should be careful what they wish for: it’s clear that the Obama FCC would block a pro-consumer ruling only if it simultaneously substituted another (perhaps more far-reaching) measure to regulate operators in the name of consumers.

AT&T gets (slightly) bigger

AT&T Inc. today agreed to a $944 million purchase of rural cell phone carrier Centennial Communications. The purchase would add 1.1 million subscribers to the 74.9 million already on AT&T Wireless. By comparison, AT&T Wireless added 2 million net new subscribers in its 3rd quarter, half of them iPhone users new to AT&T.

However, as RCR Wireless reported

The deal will not, by itself, help AT&T regain the top spot in the U.S. market. Although the carrier currently holds the position, it will soon to lose it to the combination of Verizon Wireless (70.8 million customers) and Alltel Communications L.L.C. (13 million customers).

And that’s about it for adding a large number of US cellphone customers. According to Wikipedia, there aren’t a lot of compatible (i.e. GSM) carriers left for AT&T to buy. Since a purchase of #4 T-Mobile would not pass antitrust muster (even if it were for sale), the three network owners with more than 1 million subscribers — US Cellular (6.2m), MetroPCS (4.8m) and Cricket/Leap (3.5m) — all use CDMA.

This is AT&T’s second effort to expand its exposure to wireless. Earlier in the week, AT&T spent $275m to buy Wi-Fi hotspot provider Wayport. The timing by AT&T seems curious since the hotspot business is so thoroughly commoditized, even though the recent financial meltdown means the price was lower than it would have been in July.

Given the state of the industry, it seems like a merciful exit for Wayport investors. They earned a 73% gain on money that was invested 4-12 years ago, which is not a smart investment but a great way to get out of a business that’s about to lose what remains of its pricing power (except maybe in controlled locations like airports).

Yet more evidence of Cingular mediocrity

Regular readers know that I’ve been singularly unimpressed with Apple’s choice of Cingular (later AT&T) as the exclusive US carrier for the Jesus Phone. It’s not just the idea of a five-year exclusive (which made sense under the old business model but not the new one), but also the mediocre quality of the Cingular’s US mobile phone network.

The iPhone 3G was supposed to take advantage of AT&T’s wonderful new HSDPA network. Promoters of this UMTS (W-CDMA aka 3GSM) technology claimed it would deliver downloads at “8-10 Mbps”. AT&T invites prospective customers to “Download and surf on the nation’s fastest 3G network.”

At the same time, iPhone 3G user are unhappy with their network performance. Wired asked its readers around the world to run a test to report their actual download speed, to distinguish between iPhone performance problems and network performance problems. Here is what they found:

• Tests in Germany and the Netherlands achieved 2,000 Kbps.
• Tests in Canada delivered 1,330 Kbps
• AT&T provided an average speed of 990 Kbps
• The only carriers that were worse were two Australian carriers, with an average speed of 390 Kbps

It gets better:

In some major metropolitan areas that are supposedly 3G-rich, 3G performance can be very slow. For example, zooming in on San Francisco, you'll see that 10 out of 30 participants reported very slow 3G speeds — barely surpassing EDGE.

The hypothesis is that AT&T didn’t buy enough 3G radios in the cities where the iPhone is most popular, and thus the network is getting overloaded.

As skeptical as I am about WCDMA and “wireless broadband” in general, AT&T here may have a slight advantage over its US rivals. On the wireline side, they finally have a solution that beats all DSL (although not a cable modem or FiOS or uverse). On the wireless side, neither of their EVDO rivals (Verizon, Sprint) do much better, claiming only 600-700 Kbps — although a July review of a Sprint modem measured an actual speed of 966 Kbps for its EVDO service.

Lies, dam lies, and advertisements

A phrase attributed to Disraeli (or perhaps Twain) is “'There are three kinds of lies: lies, damned lies, and statistics.”

It was the key quote from one of my favorite books of my childhood math geek days: Darrell Huff’s classic How to Lie With Statistics, which (Wikipedia claims) is the most widely read statistical text of the past 50 years. Alas, despite Huff’s wide distribution, such lies (such as truncated graphs) remain popular, particularly in the popular press.

Lying seems to be taken for granted in advertising. People can say things that aren’t true (“I lost 20 pounds in one week”) because that’s marketing license and thus people discount such claims. Still, the FTC has rules that says ads are deceptive if by omitting key information, a reasonable person would be misled. So nowadays the trick is to add small fine print, briefly flashed on the screen.

Even within this context, the AT&T ad of the past several months has been bothering me. It claims “best coverage”. But of course, that’s not true - according to Consumer Reports, AT&T places fourth after Verizon, Alltel and T-Mobile. Call quality is not a new problem for AT&T Wireless (née Cingular).

The footnote says “based on global coverage.” (Of course, AT&T has no coverage outside the U.S., just roaming agreements with other carriers). So for the fraction of minutes used by the 1% of Americans who use cellphones overseas, you might get better cell phone coverage. That’s assuming you’re willing to pay outrageous roaming rates, although it’s not clear how AT&T has better coverage than T-Mobile or a dual-mode CDMA phone. Meanwhile, the claim that a dad will get better coverage on lover’s lane because his AT&T phone roams to London is not misleading, it’s a lie.

The other lie — a new one this weekend that pushed me over the edge — is the claim that the latest Narnia movie is “even better than the first.” The first cognitive disconnect came with the review in my morning paper, which called it cliche and predictable due to hollow characters and wooden acting. However, the weekend onslaught of Disney ads is claiming Prince Caspian is “triumphant” and “the must-see film of 2008”. This is traditional movie hype, but when I can’t read the names of the critics or the periodical on my 26" TV, I got even more suspicious.

Sure enough, the only recognizable publication among the list of favorable “Caspian” quotes was CNN. Except that critic Gorman Woodfin is not a critic at CNN (founded by Ted Turner who called Christians “losers”), but instead is at CBN (founded by Pat , who wants Christians to take over the country). Given the status of C.S. Lewis as an iconic Christian philosopher and the Narinia novels as Christian allegory, the difference matters.

In strategy, we often expect ethical corner-cutting from schlocky little companies (or young high-growth companies like Worldcomm). Here AT&T and Disney are just the opposite. Both are Fortune 100 companies, and Disney is a top 10 global brand, even if the US-only AT&T is not.

So is this ethical decay in the executive suite? Another rationalization that “everybody does it”? I don’t know the explanation, but it’s not encouraging.

Cingular is terrible, but …

David Pogue is a onetime Mac trade journalist who made it to the big time with a NYT column. I don’t read the NYT anymore because (among other reasons) they now charge for opinion columns — presumably arguing that (Walter Isaacson’s latest complaints notwithstanding) ranting is more more expensive to generate than hard news.

However, the NYT is quite happy to e-mail me the Pogue e-newsletter for free. After remarking how great the pocket digicam has become, in today’s column Pogue then lists several product categories that are not there yet. #2 on the list is

The great cellphone carrier. When the iPhone came out, everybody grumbled and moaned about how Apple had chosen AT&T as its exclusive carrier. I grumbled along with them—and then it hit me: Whom wouldn’t people have grumbled about? People also hate Verizon, and T-Mobile, and Sprint. Everybody feels oppressed by the contracts, mistreated by customer service and victimized by billing gaffes.

I don’t know why one of these cell executives doesn’t just wake up one morning and realize that the way to dominate the cellphone industry isn’t taking out more ads on billboards and newspapers. It’s creating a service that’s so good, the customers love you, recommend you and (here’s the big one) don’t leave you at the first opportunity.

I think that’s fair — if Cingular (aka AT&T) is terrible, the others aren’t much better. My sense is that each is terrible on at least one thing, each creating a legion of anti-fans. (Although perhaps Mr. Pogue didn’t read this morning’s NYT article about AT&T’s 300-page phone bills for iPhone owners).

I’ve stayed with Sprint because they’re cheap (regular readers know I like cheap), because when I signed up they had excellent San Diego coverage, and now their Bay Area coverage has gotten better. They built up enough loyalty that I stuck with them after they fouled up my bill last fall, which took several hours on the phone (in 5 phone calls across 3 months) to straighten out. But this sort of billing snafu — particularly for a brand new customer — would often make an enemy for life.

That raises the question: is this an inherent problem of telecom oligopolists? Do the carriers that have good networks get hated for arrogant customer service, contract or pricing policies? (With the remaining carriers offering lousy coverage and lousy networks?) Or is there a cell phone carrier somewhere in the world that is generally loved? (Please let me know)

I would not be surprised if Metro PCS or Leap Wireless have devoted customers, if for no other reason that their flat-rate pricing model avoids the huge surprise overages that piss people off, and probably avoids most potential billing hassles too. (IIRC, they also don’t require contracts). However, neither has a national license so they’d only be suitable for customers who plan to stay within a specific metro region — clearly making enemies of people who bought the service not understanding this major limitation.

Technorati Tags: AT&T, Cingular, mobile phones, Sprint, T-Mobile, Verizon

Jack is dead

Catching up on the blog while I am Sleepless in Switzerland.

Cingular is now officially dead. The mobile phone service was announced in 2000 as a 60/40 joint venture of SBC of San Antonio and Bell South of Atlanta. It instantly became the 2nd largest cell phone carrier, and plotted out a path away from the dead-end NADC (North American Digital Cellular, aka TDMA) over to GSM.

The murder was perpetrated by SBC which — after it bought AT&T and BellSouth — decided to rebrand it as AT&T. The rebranding effort announced on January 12 has now been accelerated.

AT&T Inc. today announced a new phase of the company's branding strategy. Overnight, AT&T kicked off this phase by replacing the Cingular brand with AT&T on all in-store signage, store kiosks, and point-of-sale materials in approximately 1,800 company-owned wireless retail stores. In addition, key stores in major markets also unveiled new exterior signage displaying the new brand.

The decision to move to this phase of the branding campaign is based on research that indicates that consumer awareness of AT&T — one of the best-known, most durable and iconic brands in the world — is high and ahead of expectations.

The store makeovers are also critical to prepare for the late-June launch of the Apple iPhone, for which AT&T will be the exclusive wireless provider in the United States.

The death of Cingular ties to AT&T’s grand ambitions to dominant the US convergence space:

Many company-owned stores have also installed kiosks promoting the complete array of AT&T services — wireless, high speed Internet, TV and home phone — in the company's traditional service area, and several markets are also planning for a new AT&T Experience StoreSM, a high-energy format that encourages hands-on customer interaction.

As the AP story notes, this is not without risk:

Jeff Kagan, a telecommunications industry analyst with Mindspring Inc., said there is some risk for AT&T giving up the well-known Cingular brand. But because the industry is moving toward a single provider for multiple telecommunications services, Kagan said it makes more sense to centralize the brand.

With the death of Cingular comes the death of the Cingular “Jack” logo, which has been heavily promoted for six years.

Like other carriers, Cingular’s marketing and growth seem targeted at teenagers — i.e., kids born in 1988 or later. The Bell System died in 1984, and since then AT&T has just been a has-been long distance company. How many teenagers know or care about Ma Bell?

Graphic credit: Flickr.

Technorati Tags: AT&T, convergence, mobile phones, Cingular