Forget the Feds, Apple Is Doing Just Fine Wrecking the Wireless Business

The Feds have been examining exclusive wireless carrier deals with handset makers—think AT&T (T) and Apple (AAPL) —but the effort is a bit of a farce. Bernstein analyst Craig Moffett says it’s laughable that the wireless industry is anticompetitive and the Feds don’t have to worry about wrecking the wireless industry—Apple already has.

The argument in a research note is an entertaining read and prompts a few “hmm” moments. The biggest one comes when Moffett argues that the Federal Communications Commission and the Department of Justice are wasting their time reviewing the wireless market—especially AT&T. Why? Apple has taken any power that AT&T has. Sure, AT&T has an exclusive deal with Apple, but the iPhone maker owns the customer relationship and holds all the cards.

As background, the Feds are looking into the wireless business and whether exclusive deals are anticompetitive. Last month, Senator Herb Kohl, Chairman of the Senate’s Subcommittee on Antitrust, Competition Policy, and Consumer Rights, implored the Justice Department and the Federal Communications Commission to undertake reviews of the U.S. Wireless business, specifically text messaging rates and other fees. That turned into a hearing on June 16 (webcast).

Kohl’s group, which also spends time on hearings about college football’s Bowl Championship Series system, implored the FCC to look into exclusive deals and whether they are anticompetitive. We’ll see where the FCC goes (probably nowhere), but in the end the probe is a bit of a detour of what’s really going on in the wireless industry. To wit:

• Wireless prices are falling as carriers compete;
• Handset makers are working carriers hard;
• And the wireless game is about apps—a game carriers can’t win.

Moffett writes:

The argument that handset exclusivity is anticompetitive also comes at a curious time. Indeed, a case can be made that handset makers – well, Apple, actually – have played one carrier off against the other in virtuoso fashion, and are on the brink of stealing the wireless business from the wireless carriers. It wasn’t that long ago that AT&T’s exclusive agreement with Apple’s iconic iPhone looked like a customer relations masterstroke for the carrier. AT&T Mobility, a brand that had once been cingular-ly stodgy and tired, was suddenly, well, relevant again. Apple’s iPhone meant that AT&T was the place for cool handsets. Better, it was the place for wireless data.

Somewhere along the way, however, Apple has stolen the march, and in the process has recast AT&T from hero to villain. At Apple’s June developer conference in San Francisco, where Apple unveiled its new 3G “S” iPhone, AT&T was roundly jeered at every mention by the more than 5,000 application developers in attendance. Bloggers at the conference were all a-Twitter (so to speak) about their frustrations with dropped calls and slow data connections. Even Apple itself seemed uncomfortable talking about its U.S. partner.

With breathtaking swiftness, the technology press has painted AT&T to be the (evil) gatekeeper, with sub-par network quality and a hidden (evil) agenda aimed at preventing innocent and only oh-so-well-intentioned technophiles from simply exercising their God-given rights, like Skyping wireless voice (free), embedding high bandwidth video in MMS texting services (free), or bypassing that $40 per month laptop card by tethering their laptops to their iPhones (free, of course). The PR pressure was such that, bizarrely, AT&T felt obliged to defend itself from charges that it was being unfair to existing 3G iPhone subscribers by not agreeing to automatically subsidize upgrades to the newer model – even for customers only a few months into a multi-year contract. AT&T risks surpassing even Microsoft in Apple’s rogue’s gallery.

After reading that passage you wonder if the FCC would be doing AT&T a favor by banning exclusive deals. Moffett then cooks up the iTunes analogy, which really bonks you over the head.

Apple’s direct-to-consumer end run around the wireless industry is in many ways simply a repeat of its brilliant negotiation with the music industry at the dawn of iTunes back in 2001. Less than a decade later, Apple has managed to capture considerable value from the music industry as it sells ever more iPods.

That Apple might pull off the same feat in the Wireless business – without any help from the government, mind you – isn’t as far fetched as it sounds. It bears recalling that the music industry was initially delighted with the early results of their new iTunes partnership, just as AT&T is today, and that most of the early press about the music industry’s deal with iTunes had a triumphalist ring to it. (In another ironic and interesting parallel, the music industry was even being heavily investigated for anti-competitive behavior at the time).

Now AT&T isn’t exactly a victim here. AT&T has landed millions of locked in customers and the iPhone has been a boon for the carrier.

However, the strategic field has been shifted. Customer loyalty is to Apple not AT&T. If Apple took the iPhone to Verizon Wireless (VZ) exclusively customers would leave AT&T. Meanwhile, AT&T’s network is getting crushed over the iPhone’s data appetite. And as more apps and features are enabled AT&T’s network gets crushed more. It’s a vicious spiral—for the wireless carrier.

Moffett continues:

Something more profound than just short term economics is afoot. Apple has radically tilted the strategic playing field away from the network operator in favor of the device manufacturer. Remarkably, Apple has so thoroughly stolen the customer relationship – who would argue that Apple iPhone customers’ first affinity is to the device rather than to the network – that the network is not only irrelevant, it is rather a source of derision.

And that source of derision may even invite more scrutiny from the Feds—once AT&T’s network is swamped again.

The bottom line:

In short, the iPhone seems to be doing just fine at wrecking the Wireless business without the government’s help. And at the end of the day, we would be surprised if anything comes of the government’s saber-rattling about handset exclusivity (even if, ironically, it might actually help save the wireless carriers from themselves). Regulating handset exclusivity would, in practice, mean dictating subsidies and pricing to both carriers and handset makers, something that is very unlikely. And since every network in the U.S. runs on a different technology standard, putting teeth into regulation would mean dictating technology development to the handset makers, which is almost unthinkable (it’s a bit difficult to imagine Apple being forced to design a CDMA compatible iPhone). If there is a risk in the government inquiry into the wireless business, however, it is more likely to be the constraints that carriers have placed on applications, not on devices per se.

And if the Feds did force wireless carriers to offer multiple in some sort of network neutrality scheme then it would be devastating since “wireless capacity constraints are so much greater, and the wireless industry is so much more dependent on low bandwidth voice and text for its revenue,” says Moffett.

Comments

[Mick Weinstein:]

So Apple's genius doesn't end at industrial design and software...

Jul 13 01:36 PM

[Federico:]

WS got what it wanted, which was to mitigate any runup in apple's stock before options expiration. They were very successful for the June expirations and seem to have been successful for July.

How they spin the good numbers next week will be a good one?

Jul 13 03:04 PM

[ValueValue:]

Craig Moffett is just pointing out the long term reality. That is, carriers of anything (wired/cable, wireless, electricity, gas, water, you name it) are in essence and always will be utilities; trying desperately to be sellers of value added products that offer greater returns on their distribution assets.

The economics drive these businesses to that reality.

Apple really doesn't own that much that is exclusive. As both a prior user of a Windows Mobile phone and the new iPhone GS I can tell you that they can both do most of the same dances to the same music. The Palm, Google, and other mobile hardware operating systems/application networks will shortly turn all this functionality into a commodity.

The carriers would be wise to focus on their ultimate destiny; to be the most cost efficient, universally available, competitive, and reliable provider of digital bandwidth they can be, and pay a nice reliable utility dividend in the process. Then let the rest of world build and sell devices and application on top of it.

Jul 13 04:03 PM

[Frank Castle:]

The telling sign in all this is what Apple's deal with Verizon will look like. I'm thinking VZW is not going to agree to all the same as at&t and Apple will not get the same benefit.

And FUD - please show me any carrier that has lowered its data plan cost? I suppose Apple should go to TMO as it's GSM based and they have the cheapest data plans in the business but good luck with their bandwidth capacity and very sparse 3G locations.

Apple is going to change the industry though - the carriers are going to move to metered data plans with a bucket for X$ a month and expect over overages to kill you. Unsure that is the best for consumers but it's fair to those who arn't streaming audio / video / Skype all day and night.

Jul 13 07:48 PM

[rog1:]

Why wory about Apple. Their desire to prioritize and be exclusive killed their Macintosh computer business; And it will kill their latest venture into the iphone business. You can't be restrictive and expansive at the same time -- I doubt that they will ever learn.

Jul 13 07:50 PM

[Bob van der...:]

Larry Dignan - Your article is very timely in view of my personal experience since moving to Terry, Montana from Seattle, Washington. Upon our arrival I was happy to find out that all of my iPhone applications worked as long as have WiFi is available. Cell phone service is intermittent in the Eastern Montana area, since we are located near the Badlands, and even the local cell service providers are having problems staying connected.

Lo and behold I received a text message and email from A T & T/Cingular on July 1, 2009 that I was in violation of my contract by being outside of their direct service area. I called the phone number listed in the messages the next morning and was advised that I had 30 days to decide to cancel my contract, without penalty, and find another service provider. Apparently the contract reads that if I use my cell phone for data and phone use over 40% in areas not directly served by A T & T/Cingular my contract could be voided.

I was surprised but told the person that I understood that they had rules and I had agreed to them. Although I don't remember reading any of the gobble de coop stuff they made me sign when I proudly picked up my iPhone birthday present last September at one of their direct sales stores in Issaquah, Washington.

Here comes the real kicker, the customer service person offered to call Verizon Wireless to change over and set up my account with them. Her name is Toryann Adams and she told me that she would call me back in 20 minutes to confirm it with me.

I told Ms. Adams to be sure that I could keep my iPhone with the new carrier as I am now practically married to it. I bathe, eat, drive and sleep with it. In fact my wife is thinking of becoming one of my applications so I will give her as much attention.

Ms. Adams suggested that I get another phone perhaps a Blackberry since they have similar applications and Verizon is one of their carriers. I declined her offer and am still waiting for a call back from her. Time is ticking and I have only 17 days left before I am cut off.

In case one of the A T & T/Cingular executives happens to read the above article and my personal lament to it, please call me at [phone], I need help.

Jul 14 08:47 AM

[dkjaazz:]

Apple has already changed the wireless biz, just like it did w/ PMPs. & thus far Apple is doing quite fine w/ it's business model--shares are over $140.00/ ea. & the company has more than $25 Bn in cash, is lean & making buys that will serve it into the future. not to mention it's likely to build a new data center in NC, creating a few hundred jobs for those folks. can't say that about many other older & established tech companies in the Fortune 500-btw Apple moved up in the recent rankings.

the Feds need to steer clear of regulating exclusivity deals- they have been in place for a long time in many areas of commerce & will most likely continue. it's part of laissez-faire, allowing the market--consumers decide what & when to buy. if anything, the Feds need to concern themselves w/ getting the Telcos/Cablecos & Satcos to fulfill on the incentives provided years ago to implement broadband & digital transmission into the hinterlands in order to improve the nation's connectivity, as well as provide assistance to improve upon our current technologies.

Jul 14 09:00 AM

[edwi:]

When VZ gets Iphone I'm gettng an IPhone...does anyone know when that will happen?

Jul 14 10:03 AM

[brewer:]

AT&T exclusivity could end at any time, but this fall would be logical. I think 2010 is as long as the exclusivity could last, frankly. However, the price of the phone isn't going to go down much, and you may have to pay much more for the phone to buy any sort of unlocked version. (Which is what everyone seems to want.)

Jul 14 10:54 AM

[martyg:]

apple's poor decision regarding mac computers is so bad that they are the most profitable computer manufacturer in the usa (includes hp) and its computer growth continues unabated. pick on somebody else with another lame comment.


On Jul 13 07:50 PM rog1 wrote:

> Why wory about Apple. Their desire to prioritize and be exclusive
> killed their Macintosh computer business; And it will kill their
> latest venture into the iphone business. You can't be restrictive
> and expansive at the same time -- I doubt that they will ever learn.

Jul 14 12:24 PM

[Karen Mulvany:]

The evolution occuring in the wireless sector towards a broadband data-centric model was inevitable. To blame Apple for the demise of the historical voice-centric wireless business model misses the importance of underlying industry trends. Although Apple is a catalyst, the traditional voice-centric wireless business model has been positioned for disruption for years, with or without Apple, as consumers have been awaiting a combination of an appropriate platform and a fast enough wireless service to satisfy the latent and unmet demand for wireless data applications, VOIP among them. AT&T is getting hammered now because they are not providing enough wireless bandwidth for their customer base, which is necessary to success in the emerging wireless broadband world. There is, or will be, an affinity towards wireless carriers, but ultimately it will be towards those that can meet consumer demand for wireless bandwidth, not those that happen to have a short-term exclusive on a particular handset.

The technical impediments to making a given handset available for multiple carriers are the problem of the equipment providers to solve. Un-tethered (unsubsidized) handset pricing will be higher of course, but in all likihood carriers will offer lower cost un-tethered service packages in response with the ultimate cost to the consumer over time no higher, and probably less. Semiconductor companies serving the wireless industry forsee handsets that will serve multiple frequencies and technologies. It seems unlikely that handset manufacturers would not welcome the opportunity to expand their total available market to address multiple carriers.

Decades ago when AT&T was a monopoly, the company was required to open up the CPE market to competition to eliminate the tethering of telephones to service. The factors underlying the current political and regualtory inquiries are much the same. Consumers clearly want choice, both of handsets and service providers. Congress and the FCC are under pressure to give it to them, regardless of near-term technical impediments.

Jul 14 12:42 PM

[Bob van der...:]

I received a call from Justin K., Office of the President, yesterday afternoon responding to my complaint in the email I sent earlier that day to Randall Stephenson, the AT & T CEO, which reads:

"Mr. Stephenson:

I am contacting you direct since I have been unable to obtain satisfactory answers to my question about the lack of service in the area to which I recently moved.

It seems like my wife and I, both of us own iPhones, have entered Dark Territory insofar AT & T is concerned. We purchased our cell phone in Issaquah, Washington back in August and Septermber 2008 after receiving satisfactory service from your company in Las Vegas, Portland - OR, and Seattle since November 2006. We especially liked the fact that you offer roll-over minutes on your program. Verizon had been our carrier for twenty years prior and did not respond to my inquiry as to why did not offer a similar rate program for their cell service.

My complaint with your company is that your customer service is more interested in telling me chapter and verse according to AT & T policy rather than dealing with me as a valued customer. Both customer representatives, whom I am copying with this email, kept apologizing profusely for not being able to help me keep AT & T as my carrier in Montana. The policy and the contract I signed was explained to me in every detail, something your sales people at the your store neglected to do, and offered to set up an account for us with Verizon Wireless. I objected to that only because it will make my iPhone useless other than as a mini-laptop with no access to email etc.

My real complaint is that your marketing strategy has become very obvious to me. You are only interested in providing service in areas where you are a direct carrier. The hardware used towards that purpose has become secondary and as your exclusive with Apple is expiring soon will not be your main driving force to obtain profit for your stockholders.

Thanks for listening to me and would appreciate a response (hopefully positive) back from you as soon as possible.

Bob van der Valk"

Justin said that he would look into my complaint and get back with me today. I will post his response to this comment section as soon as it received.

Jul 16 07:41 AM

[Bob van der...:]

Updated, 12:01 p.m 7-15-09: Per the Los Angeles Times - The expiration date of the exclusive iPhone deal between Apple and AT&T has not been officially released, but in April the Wall Street Journal cited anonymous sources saying AT&T is hoping to extend the deal into 2011.

Jul 16 08:02 AM

[Brian Flores:]

My data plan with AT&T is cheaper now than it was just 3 or 4 years ago. I used to pay $45/month for data; now I pay $30. If Verizon doesn't agree to Apple's demands, they don't get the iPhone. It's as simple as that. If AT&T were to make a deal with a carrier other than Verizon, that would probably result in a stock hit for Verizon, but they appear to be doing just fine without the iPhone.


On Jul 13 07:48 PM Frank Castle wrote:

> The telling sign in all this is what Apple's deal with Verizon will
> look like. I'm thinking VZW is not going to agree to all the same
> as at&t and Apple will not get the same benefit.
>
> And FUD - please show me any carrier that has lowered its data plan
> cost? I suppose Apple should go to TMO as it's GSM based and they
> have the cheapest data plans in the business but good luck with their
> bandwidth capacity and very sparse 3G locations.
>
> Apple is going to change the industry though - the carriers are going
> to move to metered data plans with a bucket for X$ a month and expect
> over overages to kill you. Unsure that is the best for consumers
> but it's fair to those who arn't streaming audio / video / Skype
> all day and night.

Jul 22 12:35 PM