Will AT&T have the iPhone forever?

According to the latest reports from the Wall Street Journal, AT&T’s multi-year iPhone exclusivity deal is set to expire at the end of 2010 and CEO Randall Stephenson is negotiating with Apple to extend AT&T’s arrangement for another year. AT&T isn’t commenting on the story, but the report is generating headlines galore, speculating on whether AT&T can keep it’s favored-nation status with the world’s hottest smartphone maker. Those stories, though, overlook the obvious.

There seems to be this assumption that Apple wants out of the deal, so it will be free to sell its iconic device through any retail channel over any operator’s network in the US. The reality is, though, that AT&T has the only nationwide network in the US that can support the iPhone in its current state. Verizon and Sprint are CDMA operators. While T-Mobile is a fellow GSM player building out high-speed packet access (HSPA) networks, its 3G is at the wrong frequency. Who does that leave? Cincinnati Bell?

Sure, Apple could design an iPhone with a CDMA radio, and it could design an iPhone supporting T-Mobile’s Advanced Wireless Service (AWS) 3G band, but why would it want to? Apple’s approach so far has been to create a single device that it can sell all over the world. That’s meant supporting the most common 3G frequency bands (1.9 MHz in the Americas and 2.1 GHz in Europe and Asia) and the most common radio technology used globally (by far GSM and UMTS). If it were to build CDMA or AWS phones it would essentially be tailoring iPhone for individual–or at least just a handful of–operators, destroying what must be a significant advantage in volume production and eating away at the phones presumably hefty margins. Apple could also just add new frequencies or technologies to the existing iPhones, but again, they would raise the cost of materials and drain more power from the device.

Even if it were economically feasible to create the every-carrier iPhone, why would Apple bother? Apple has demonstrated customers it doesn’t have to go to customers–they’ll come to Apple. Millions of subscribers have dumped their wireless provider in favor of AT&T, just to get their hands on the iPhone. Finally, AT&T’s exclusivity agreement has plenty of advantages for Apple: namely control and incremental revenue. Apple isn’t just selling a device, its getting a chunk of data subscription and applications revenue from AT&T, though the exact financial details haven’t been disclosed. Those are terms AT&T is plenty willing to accept as long as its an exclusive provider, but if Apple starts distributing its devices through any and every operator, its negotiating position suddenly isn’t so solid.

Extension or no extension, I think Apple is happy right where it is.

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