AT&T Preps Network for iPhone Throwdown with Verizon

By Tara Seals

AT&T Inc. has a problem: The iPhone has a wandering eye, and it might not stick exclusively with the carrier for very much longer. AT&T is ready to take its guns to town to avoid losing customers or potential customers, by beefing up its network (and its competitive advantage). But that might not be enough.

The carrier is teetering on the brink of losing its exclusivity for the device to …drumroll … its most ancient of enemies, Verizon Wireless. If reports are correct, that is. But even if Apple doesn’t announce a CDMA version of the gadget this summer, it’s likely that AT&T would lose exclusive rights to the device anyway. The term of AT&T’s exclusivity is up after this year, and Apple has made the iPhone available to multiple carriers in almost every other market in the world rather than renewing similar contracts.

That loss presents a couple of issues for AT&T. For one, when exclusivity is lost, the traffic stemming from that device becomes that much more difficult to monetize, because the carrier can no longer charge a premium if there’s a motivated competitor to contend with. And monetizing heavy data traffic is hard enough as it is. Two, AT&T has been slammed by negative press for its (perceived) lack of 3G coverage, network congestion and dropped calls. If it has to compete with another network for the same device, it might not win.

AT&T has been contending with the latter issue by beefing up spectrum in major markets with its 800MHz holdings, and by pouring investment into upgrades. It plans to spend $2 billion more than last year on wireless networks and backhaul, up from $17.3 billion spent in capex last year. New York City and San Francisco, where iPhone penetration has skyrocketed, will be particular targets of the upgrade, according to John Stankey, CEO of AT&T Operations. He said that the carrier will double what AT&T did in 2009 in terms of increasing capacity, with 2,000 additional cell sites and 400,000 more square miles of 3G coverage.

But despite the vouching of Luke Wilson as to the superiority of AT&T’s network speeds (and subsequent verification by curious third-party testing outfits), customers still complain. And in a survey of 12,000 wireless subscribers from JD Power and Associates, AT&T came in at an underperforming 730 points out of 1,000 for customer satisfaction. That’s against an industry average of 735. Leaders were Alltel/Verizon Wireless and T-Mobile USA, which all tied at 747.

As to the issue of monetization, it’s known that a wireless customer on a flat-rate plan tends to become unprofitable when usage rises beyond around 3 MB. And AT&T has its share of data hogs. “What we are seeing in the U.S. today in terms of smartphone penetration, 3G data, nobody else is seeing in the rest of the planet,” said Ralph de la Vega, president and chief executive for mobility and consumer markets at AT&T. “The amount of growth and data that we are seeing in wireless data is unprecedented.”

He said earlier in the year that 3 percent of AT&T’s smartphone users consume about 40 percent of all wireless data. “We’re going to try to focus on making sure we give incentives to those small percentages to either reduce or modify their usage, so they don’t crowd out the customers on those same cell sites,” he said.

“We believe carriers will increasingly have to manage the usage side of the equation,” said Bernstein Research analyst Toni Sacconaghi, who explains that bandwidth consumption since the introduction of the iPhone has grown by 50-fold, while data revenues have grown by only 250 percent. “Carriers that have not already done so are increasingly likely to adopt usage-based pricing schemes that more fairly match price to usage but which will also inevitably discourage the most profligate kinds of applications.”

Which is fine, except for the fact that iPhone competition will drive data tariffs down, not up, and introducing metered billing when you’re trying to stave off Verizon, say, is the kiss of death.

Thus, analysts say the carrier must turn to new-thinking strategies like implementing policy management and DPI for better customer management and service enablement, better customer up-sell campaigns, advertising, personalized service packages with “digital lockers,” the creation of more compelling three-screen bundles, and above all, network optimization through software, as well as tweaking things like antennae positions in towers to be more effective.

But will it embrace new ideas? In a vote for the “no” column, the Wall Street Journal is reporting that AT&T is responding to the loss of exclusivity threat by responding to the capacity issue, not necessarily the monetization issue. It is apparently in a mad “100-day” scramble to add radio boxes to towers and lay higher capacity backhaul links from the RAN, ASAP.

All of that is absolutely critical for AT&T. Unfortunately, there’s no mention of the other side of the equation. The carrer is adding to the spending profile by necessity, but what about recouping that?

In any event, we’ll likely have to wait a few months to see how the competitive pressures take their toll, and whether AT&T’s flurry of network activity will be enough to meet them.