AT&T pushing Apple for longer iPhone exclusive

But sticking with just one carrier isn't good for Apple or consumers, says analyst

AT&T Inc. is negotiating with Apple Inc. to extend the deal that makes it the exclusive U.S. carrier for the iPhone, The Wall Street Journal reported yesterday.

The telecommunications company's agreement with Apple expires next year, the newspaper said, but AT&T is talking with Apple about an extension into 2011.

Apple declined to comment on the Journal's story other than to confirm that its deal with AT&T was "multiyear." AT&T did not immediately respond to a request for comment.

When Apple launched the iPhone in June 2007, most analysts said they believed the two companies had signed a five-year deal. "I was under that impression, too," said Ezra Gottheil, an analyst at Technology Business Research Inc. "But that was not based on any hard evidence, and I didn't rule out the possibility of a shorter agreement."

The benefit to AT&T of its exclusive -- it's the only U.S. sales outlet other than Apple itself for the iPhone, and the sole network for the smartphone -- is clear, said Gottheil. In the fourth quarter of 2008, for example, AT&T acquired 2.1 new wireless customers, 1.9 million of whom are new iPhone customers.

"AT&T would obviously prefer to keep the arrangement, but it's not in the long-term interest to either Apple or consumers," Gottheil said.

The increasing popularity of calling affiliations -- the "friends and family" concept where customers aren't charged minutes for time spent talking to a limited number of pre-selected numbers -- makes it "much harder to switch carriers," said Gottheil. "And that just increases sales resistance for the iPhone."

In the past, consumers have complained about poor connections and slow data speeds; some have even sued the carrier and Apple for such things as dropped calls. The criticism has subsided, however, since last year.

But that doesn't mean Apple isn't thinking about dumping the exclusive with AT&T and taking the iPhone to other carriers, Gottheil said. "Apple has indicated that its corporate strategy is to make a good profit, but not an overly high profit," he said, citing Apple executives who have pegged a margin rate of 29.5%, considerably lower than the margins the company enjoyed in 2007 and much of 2008.

The recognition that there's money to be made by not going after every single dollar on the table is a factor Gottheil believes makes it more likely that Apple will lean toward letting multiple U.S. carriers sell the iPhone. It has used that practice in some overseas markets, where several networks sell contracts to iPhone owners.

"I think Apple would be more inclined to drop the exclusive with AT&T than to keep it," Gottheil said. "I believe they've satisfied much of the pent-up demand for the iPhone. ... There are signs that it's not selling as fast as it once did. And the BlackBerry continues to show strength."

There's a downside, of course, if Apple abandons exclusivity. "It would not get as much of a premium for the iPhone from AT&T as a subsidy," said Gottheil, "since it would not be attracting customers only to AT&T."

He compared the current iPhone dilemma to what Apple faced in the late 1980s, after co-founder Steve Jobs was bounced from the company. "You can liken this to when Apple had a monopoly on computers with a desktop graphical user interface, but because it wanted to maximize profit, it lost the market and became a marginal player," Gottheil said.

Only when Jobs returned to run the company did it recover and again build market share.

"They don't want to make the same mistake with the iPhone," Gottheil said.

Copyright © 2009 IDG Communications, Inc.

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