Monday Note

by Jean-Louis Gassée

AT&T can’t seem to catch a break. A couple of weeks ago, at All Things Digital, an industry conference, Randall Stephenson, AT&T’s Chairman, got the audience to snicker and roll eyes. The conference is held by the Wall Street Journal, led by its digital guru, Walt Mossberg and, “by invitation only”, $5K a pop, gathers movers, shakers and wannabes of what is now broadly called the digital media industry.
Mr. Stephenson was on stage, answering Walt Mossberg apparently softball questions. But, when you look more closely, Walt applies a trial attorney’s precept: Only ask questions for which you already know the answers, let the jury see how the witness responds. We were the jury as Walt asked the AT&T top dog about its wireless network performance problems. The witness got off to a decent start: “Yes, when the iPhone 3G came out we weren’t ready.” Then, he proceeded to claim things had significantly improved. That’s when the snickering started. In Silicon Valley, we all know the blank spots, the bad 3G coverage, right in the heart of high-tech’s garment district. See the full interview here.

Later, Stephenson committed a faux pas of Detroit proportions: he claimed everything (phone, Internet connection, TV) worked well when he moved to his new home in Texas. Really? AT&T’s Chairman, CEO and President gets a good connection? In a further misguided attempt to connect with his audience, he even mentioned his Apple TV. Clearly, he’s one of us, a discerning Apple customer…
By sheer coincidence, the very same morning, AT&T had announced the HSPA (High Speed Packet Access)
upgrade for its wireless network, twice the current speed, 7.2 Mbps. More snickering as no one had ever seen the promised 3G speed and as the HSPA deployment dates were vague. More on that in a moment.
Queried about the iPhone exclusivity, Randal Stephenson pronounced himself very happy, quoting a $100 ARPU (Average Revenue Per User) for iPhones.

That number got me thinking and googling. Looking through AT&T’s latest filings,

I found the company’s wireless ARPU to be $50.80. I whipped a quick spreadsheet to try and estimate the proportion of iPhones in the 78 million subscribers, and to extract the difference between non-iPhone ARPUs and the $100 for iPhones. In other words, I wanted to know how much extra (not total) money AT&T made from an iPhone subscriber. That number isn’t $100 minus $50.80 because the latter number averages all subscriptions, iPhones included.
With 15 million iPhones, the extra ARPU is close to $61. With 10 million iPhones, the numbers is $56. (For reference, Apple says it shipped over 40 million iPhones and iPod Touches – worldwide.)
Using a conservative 10 million iPhones and a $55 ARPU bonus, one could say AT&T makes an extra $6.8bn (billions) per year compared to what 10 million average phones bring. How much of those $6.8bn AT&T ships back to Apple isn’t known,  carefully obscured on both companies’ regulatory filings.

This gets us to more snickering and worse.

Two weeks after the Mossberg interview, Apple announced its new iPhone 3G S. The new model uses higher speed HSPA networks (a.k.a 3.5G) available around the world but not here in the US. Not yet says AT&T without offering a date. Same for MMS messages (think SMS with more media such as video) or tethering, the ability to use one’s phone to connect one’s laptop to the Internet, with a cable or with Bluetooth. You can picture yourself with the iPhone in your pocket acting as your laptop’s Internet gateway.
At Apple’s developers conference, the venue for the iPhone 3G S announcement, the audience booed AT&T.
Later, customers got in the fray. The prices, $199 for the 16Gb model, $299 for the 32Gb unit, looked normal. But for customers still under contract, that is still inside the 24-month duration of the agreement, the upgrades were slated at an extra $299 or $399 on top of the subsidized price. This doesn’t make AT&T more popular with already frustrated iPhone users.

On the other hand, irate iPhone users appear to forget they signed a contract. The $199 price for a 3G iPhone included a loan of the difference between the $199 number and the true, unsubsidized price; said loan to be repaid over 24 months.

There are two problems with this view.

First, assuming you get an unsubsidized iPhone, a March 2009 rumor had AT&T planning to sell one for $799, your plans, voice and data, will cost the same. In other words, carriers don’t want you to buy an unsubsidized phone, they’ll penalize you if you do by not reducing the service rates.
Second, cellular carriers got into the habit of breaking their own agreements: if you wanted to take your business elsewhere, a “retention specialist” would offer you a nice upgrade before the nominal end of your contract. Customers got the joke and stopped taking the 24-monyhs contracts seriously.
Today, iPhone users can’t go elsewhere because of the AT&T exclusivity. But what about tomorrow, when the exclusivity expires?

When looking at the $6.8bn premium on top of average subscriber revenues brought by iPhone customers, we can be tempted to think AT&T ought to try and resign existing iPhone customers with a big smile, with an enticing financial offer.
Perhaps AT&T knows something we don’t know yet, perhaps they know the exclusivity will expire soon, perhaps they see a big Verizon campaign to attract iPhone users and their fat ARPUs – this could explain why AT&T wants more money upfront now. But this theory isn’t consistent with the attractive new customer pricing. Perhaps I ought to look at the exact wording of the new 24-months agreements. In particular, what is the ETF, the Early Termination Fee for the new iPhones. AT&T’s wireless site is down for maintenance as I write this, I can’t check if the new agreements are available.
We’ll see. —JLG

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