Why the End of AT&T's iPhone Exclusivity Would Be Good for Apple

29 Comments

AT&T’s exclusive deal with Apple as the U.S. carrier for the iPhone expires next year, and there are signs that the arrangement between the two companies will then end. Such a move would bode very well indeed for the entire Apple ecosystem, from iPhone users to application developers. Apple itself, of course, stands to benefit the most.

Benefits Abound

As Morgan Stanley analyst Kathryn Huberty noted in a recent research report, the iPhone’s market share grew 136 percent in France when it was offered on multiple carriers. iPhone sales in the U.S. would double if Apple ended its exclusive contract with AT&T, she predicted. “We expect Apple to broaden iPhone carrier distribution over the next two years and believe this opportunity is under-appreciated by the investment community,” she wrote.

Apple is clearly aware of the multiple-carrier opportunity, and can’t ignore it, despite the substantial kickbacks that it earns from AT&T’s premium-priced iPhone service plans. There are now multiple carriers for the iPhone in the UK, and all three major carriers in Canada are now supporting it. Through such arrangements, users get the benefit of competitive service plans and prices, and Apple has the chance to win new customers and ease the woes of disgruntled ones.

Still, there would be benefits far beyond simply moving more handsets and gaining market share. Ending the AT&T exclusivity would position Apple to best take advantage of something it already has: enthusiastic iPhone app developers, who would welcome more openness in Apple’s carrier strategy. The company is starting to make more money from its highly successful App Store, where more than 2 billion apps have been downloaded. And as history has proven, developers and their applications have been directly responsible for the success of many types of technology platforms. Would Microsoft ever have gained dominance on the PC desktop without developers enthusiastically producing applications for its platform? No way.

So What About AT&T?

What will all this mean for AT&T, though? After all, as Om noted in his post, “Why AT&T Is Addicted to the iPhone”:

  • AT&T added 875,000 new postpaid subscribers in the first quarter of 2009 and saw 1.6 million iPhone activations. A whopping 73 percent of total net new subscribers came to AT&T by way of Apple’s iPhone.
  • From a revenue perspective, during the first quarter of 2009, the average iPhone user gave AT&T about $94.74 a month vs. an average postpaid AT&T customer, who spends about $59.21 a month.

Make no mistake: AT&T would like to continue to be the exclusive U.S. carrier for the iPhone, but its enjoyable arrangement is time-constrained. As evidence of even more pressure on Apple to expand out to other carriers, look no further than the new deal between Verizon Wireless and Google to promote Android and how it increases the number of U.S. carriers that work with Android to three (GigaOM Pro, sub. required), including T-Mobile and Sprint.

As Android continues to gain market share, major carriers and handset makers back it and developers continue to produce solid applications for the Android Market, Apple is undoubtedly watching closely — especially with analysts from Gartner predicting that Android will be the No. 2 smartphone OS by 2012. Both AT&T and Apple also have to be aware of the fact that the FCC continues to investigate exclusivity deals between carriers and handset makers, and has pledged to take action if they’re found to cause harm to consumers.

AT&T’s CEO Randall Stephenson has already conceded, at the Fortune Brainstorm conference over the summer, that his company’s exclusive deal with Apple will end “eventually.” There are good reasons to think it will end sooner rather than later, and a much healthier iPhone ecosystem will be the result.

29 Comments

Garrie

Quote from FT

“Ralph de la Vega, head of the wireless division, said that the company had other products that could pick up the slack and that because of its network the iPhone would run fastest with AT&T.”

If Ralpy thinks his network is any good he is smoking crack.. at&t has a long way to go before it catches up to Verizon. I’m a big lover of my iphone but, hate my at&t service. Hopefully at&t will start working on their network but right now I’d switch to Verizon in a heart beat if I could.

Richard Bennett

Net neutrality Bolsheviks railing against handset exclusivity isn’t news; Prof. Wu sent them in this direction with his wireless Carterfone paper in 2007. Comrade Rupley discounts the value of the revenue-sharing deals possible in a carrier-handset vendor relationship. If Apple can make more money by walking away from revenue sharing, they will; they’re good capitalists, after all.

F1Mikal

“…the iPhone’s market share grew 136 percent in France when it was offered on multiple carriers. iPhone sales in the U.S. would double if Apple ended its exclusive contract with AT&T, she predicted. “We expect Apple to broaden iPhone carrier distribution over the next two years and believe this opportunity is under-appreciated by the investment community,” she wrote.

Apple is clearly aware of the multiple-carrier opportunity, and can’t ignore it, despite the substantial kickbacks that it earns from AT&T’s premium-priced iPhone service plans. There are now multiple carriers for the iPhone in the UK, and all three major carriers in Canada are now supporting it.”
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The consumers will not get the same benefits that they do in other countries because the USA mobile phone services are not all using the GLOBAL standard, GSM… there would be more competition but for some reason Verizon has its own system and apparently T-mobileUSA is not widely used outside of cities.

Apple wins. YEA!

But if Verizon gets the iPhone, be prepared for more dropped calls, more bandwidth clogging with more data usage…and customer service, HAH! I hear lots of ‘issues’ with Verizon’s customer service. For example they told me sister on her first trip to the UK & Europe this past summer that she could use her phone there.

Thank goodness I got her sorted.

My 2 cents

Edward Yang

I’m actually of the inclination that the exclusivity agreement was a detriment long term for AT&T. I was one of many who made the switch from Verizon to AT&T just for the iPhone. Once upon a time I had vowed to never come back to the horrible network of AT&T but lo and behold here I was. Three years later, not a day goes by that I don’t curse AT&T. It seems I’m always in a deadzone; it could be my home, my client’s office or some public event. Dropped calls, so common in the late 90’s, are still a major problem a decade later. The massive strain on AT&T’s network from the high bandwidth demands of iPhone users have further frustrated those trying to take full advantage of all the iPhone had to offer. If anything, many are just further convinced that they day when iPhone exclusivity ends is the day they will leave AT&T…and this time for good.

Edward Yang
Partner, Firecracker PR

Sebastian Rupley

@ Louis and Paul — you both raise interesting points about Verizon. Paul, I would add to your good piece of analysis there that the fact that Verizon has made a big commitment to Android may mean that it won’t become a carrier for the iPhone. I’ve seen some posts around the web saying as much. On the other hand, VZ remains so committed the BlackBerry that perhaps one could interpret them embracing Android too as solid evidence that they intend to be pretty ecumenical about what is an increasingly fragmented collection of smartphone platforms.

Best,
Sebastian

Paul

I don’t think Apple will offer a phone capable of handling CDMA in the US. It will wait till LTE is deployed, so until then its unlikely that Apple will offer the phone on other networks in the US.

In the UK there was some discussion that O2 lost its exclusive rights because it failed to sell some pre-determined number of phones. I could be wrong, but I do remember reading this somewhere and possibly the information itself is wrong.

In France it was mandated by government wasn’t it?

I can’t see the iPhone on Verizon, a company that seems to cut features out, that Apple most certainly would want to deploy. So what they have a robust network, but hardly anyone can use it for anything but voice. Data use simply hasn’t grown as much as it has on the AT&T network and this can only be because devices on the VZ network simply aren’t easy to use or make it more difficult to use. One might even say their network is robust because you can’t use.

Louis Wheeler

I wish the people who are making these strange claims knew anything about mobile phone technology. It would stop them from making fools of themselves.

AT&T and Verizon use incompatible technologies and frequencies. AT&T is not as good as Verizon on the mobile phone side, but Verizon’s web browsing is quite bad. And nothing will make it better until LTE technologies show up in two to three years.

Apple is better off waiting for LTE chips and ISP support to arrive on AT&T. GSM is the world’s standard, not Verizon’s CDMA, so Apple will experience more growth by staying with GSM for the next couple of years.

TimB

Huh? Your point seems to be that the growth that would come from offering the iPhone beyond 1 of the 4 (US) national carriers would be offset by the extreme difficulty of offering it with two different radios? Tell that to Blackberry which has done so for years.

LTE is indeed the future, but at current rates, Verizon could well beat AT&T to market with it.

Derek Kerton

“LTE is indeed the future, but at current rates, Verizon could well beat AT&T to market with it.”

More than “could”. Verizon has stated aggressive LTE roll-out dates and began deployment, and AT&T has publicly stated a delayed approach, emphasizing HSPA+ upgrades first.

Jake

What are the signs that the exclusive arrangement is going to end soon?

Don’t you usually end up with one carrier when you have a cell phone in the US? I’ve owned around 8 phones over the last 13 or 14 years and they were all subsidized and locked to a carrier. Accounting for the M&A and name changes over that period, they were on 3 networks.

I guess you can buy an unlocked phone off the web somewhere and flip around prepaid sims, but aren’t those sims just resold minutes on the couple of networks where you are at the moment. Looking around, I don’t see a multitude of towers on the horizon beaming with diverse spectrum.

It seems as if most of the interesting handsets have had some sort of exclusive arrangement with the carriers – either completely exclusive for some period of time, say 6 to 9 months. Or there have been carrier specific models produced with some variation on features. Handsets like Treo come to mind. It seemed as if you could get Treos early on Sprint. Or wait for the feature stripped version from Verizon. If they got to Cingular, they would come in different colors.

Sebastian Rupley

@Valley Bob — I have used the iPhone, but it’s not currently my choice…Sent From My Verizon Blackberry :)

@macdad — I know of several people who also declined the iPhone because of the one-carrier limitation–Apple will gain market share when it eliminates that limitation, in my opinion.

@AdamC — I like it! Buy ’em and make ’em better!

@ dhario — I’ve been using the BlackBerry lately, which is CDMA. I get pretty dependable service through Verizon. Just a citation.

Best,
Sebastian

dhario

does it make sense for apple to create a cdma specific phone for the US market and change their supply change to accommodate a single carrier? i’m not sure who the other CDMA carriers are outside of the US, but I suspect not enough to justify redo’s to the design, chipsets, usability, testing, manufacturing etc. for apple.

Derek Kerton

Nope, Verizon is switching to the GSM evolution path with LTE, starting 2010. At that point, they will converge with Apple’s chosen radio technology.

When the time comes, and VZW has acceptable urban LTE coverage and GSM rural roaming deals, then VZW can offer an iPhone 4G.

AdamC

It would be better for Apple to buy 20% of ATT and turn it into the best telco there is and shut the hell up of VZ.

macdad

Obviously, I am not the only one who would have bought an iPhone when it came out as a less-expensive smart phone – IF the carrier had not been AT&T. Being available through several carriers makes it an idea I would have considered – but too late, for I have already bought myTouch.

The only self-interest is VB’s admiring his own misstatements.

HD Boy

Om: Insightful article with helpful information for millions of current and prospective Apple customers, even if Valley Bob is blind to it.

Valley Bob

Ah, another day, another blogger advancing their personal crusade to make their own iPhone better.

Whats next, an article about how *entreprenuers* aren’t doing enough to “change the world”?

Please stop subjecting us to this load of self-interest and write articles that actualy matter.

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