Analyst: Forget the Feds, Apple is 'doing just fine at wrecking the wireless business'

Analyst: Forget the Feds, Apple is 'doing just fine at wrecking the wireless business'

Summary: The Feds have been examining exclusive wireless carrier deals with handset makers---think AT&T and Apple---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.

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The Feds have been examining exclusive wireless carrier deals with handset makers---think AT&T and Apple---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 its 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 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 the 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.

Topics: AT&T, Apple, iPhone, Mobility, Networking, Wi-Fi

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190 comments
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  • that's like SAP "wrecked" outsourcing...

    while I agree the govt inquiry may come to nothing, Moffat's argument is ingenious. By agreeing to a locked SIM, allowing AT&T to continue to play games with 3rd party apps like Skype and continuing to not push AT&T on documented service coverage issues and a slew of other areas, Apple has not wrecked much in wireless.

    The reality is after 9 years of 3G rollout the US still has an unbelievably low 3G coverage, and for all the talk of 4G the rollout will be similarly slow. That is where the govt needs to be become more interventionist.

    In our system of checks and balances we need the executive branch to offset the strong lobby telcos have in our legislative branch. But the agenda needs to be broader than just device lock-in. It should be how does the US have the speediest and widest coverage at the lowest price. Sorry but Apple so far has not done much to change that goal and in fact may have hurt it by agreeing to some of AT&T's pricing and practices.
    vmirchan
    • sorry Moffett not Moffat

      apologize for butchering his name in comment above
      vmirchan
    • Disagree?

      Apple has wrecked several of the Telcos favorite cash cows and control
      mechanisms which are now totally bypassed by the iPhone.

      For example, ringtones are free, music, movies, TV shows, OS updates
      and podcasts come directly from Apple, not the telcos. In the past, telcos
      thought all of these services could be big revenue sources. WRONG.

      Furthermore, Apple has made Wifi standard in any type of smartphone so
      people can download any or all of these products without even using
      their monthly subscription minutes and worse, people can download
      these things directly to their computers, sync and not even use their
      handset. Everything is completely backed up to my computer whereas
      Verizon wants me to pay them to transfer data from an old phone.

      Skype is available for iPhone and iPod touch over wifi, why waste your
      expensive minutes on AT&T's 3G network, when you could just make a
      normal call. Doesn't that defeat the purpose of using Skype?

      Remember, Apple has only been at this for two years and has made more
      change than anyone else in the last ten. Wait two more years, especially
      once Verizon and AT&T start rolling out the same 4G network. Then the
      telcos really will be just "dumb pipes."

      BTW, I thing you mean "disingenuous" not "ingenious."
      Synthmeister
      • Need a history lesson

        [i]For example, ringtones are free, music, movies, TV shows, OS updates and podcasts come directly from Apple, not the telcos.[/i]

        This shift started happening long before iPhone entered the picture. My old $15 Nokia "dumbphone" allowed me to use free ringtones of my own making. We won't even mention that "other" maker of smartphones where you have been able to use your own ringtones and transfer your own music and video since the beginning of the millenium.

        [i]Furthermore, Apple has made Wifi standard in any type of smartphone[/i]

        ROFL! Okay. Smartphones in the iPhone's price range have nearly always had WiFi.
        NonZealot
        • Big picture still holds true

          While you make a valid point that some features
          like free ringtones and wifi existed before the
          iPhone, you're arguing small points that don't
          negate the overall point the previous poster
          made. Apple did wrestle much control away from
          the carriers (or dumb pipes as we say) and for
          good reason. The carriers were trying to build
          a business by ripping us off and playing the
          middle man for ring tones, apps, etc. They lost
          that leverage as other phones are now moving
          towards Apple's business model. I believe that
          was the point of the previous post and that
          bigger picture does hold true.
          techconc
          • Being First Doesn't Make You The Industry Standard

            Thank you for making such a poignant post that I agree with 100% because it is accurate.The larger point is this: just because a company creates a product or service does not mean anything. Apple was also not the first company in the portable device industry either. Palm dominated that industry, then but now its Apple. Apple was not the first company in the music download business, the industry's own conglomerate sites were, and Apple has crushed them. Apple was not the first company in the video download business, once again the industry owned sites wer, and Apple now dominates. Apple was definitely not the first in the wireless phone market, but they have transformed the industry worldwide. Apple has not fully entered the eBook market but when they do Amazon will have big problems. They already have a better device: the iPodTouch. When Apple gets serious and develops a larger version of the iPodTouch that is more elegant and less bulky it will crush the Kindle. Why because they already have iTunesU and other free podcasts ready for consumers. Apple has perfectly executed the Technology Adoption Model proposed by Davis (2009) that states generally that people adopt new technology when it has perceived ease of use and the works as it was intended to perform. Apple has its own issues, but the telecomms are way out of control. They have to regulated.
            cpodman
        • And how many did they sell?

          Start by listing every smartphone in that price range and tell me how many are actually still being used? Other phones may have "always" had WiFi, but, much like the iPod made digital music ubiquitous, Apple made it sexy, easy to use ...
          ImpartialObserver
        • thank you

          I get so tired of people talking about iphone and apple doing things that others were doing long before them!
          thinklady
          • Indeed.

            In fact, for example the so called "Ipod Revolution", where the number of ipod is less that 40 million, while the number of portable mp3 player is over a billion. Ipod was a success for Apple but, in a broad aspect, Ipod was just a small drop in a ocean of devices.

            I think the bluff of Apple is created by a group of self centrist people, a selfcentrist think "if i own a xxx, then most of the people of the world must also own xxx".
            magallanes
          • No Doubt.

            The funny thing is people want to point at Apple because they are successful at what others have already been doing. That's like have a hundred kids raking leave the Mac came in with a better rake and got more leaves so no they are the bad guy. Every one had the ability to make the larger rake, they just did not want to invest until they saw it made money.
            spikedstrider
        • No WiFi at Verizon

          You are wrong that smartphones have nearly always had WiFi. Verizon is notorious for NOT having wifi enabled phones. I have their Treo 700wx (ugh) with no wifi .. I've looked at their other smart options and don't see any real choices there .. it's the reason I may move to an IPhone.
          keepaneye
          • No WiFi at Verizon

            Verizon has never allowed WiFI, but they are not the only carrier in town.
            But the point is taken in that Verizon has encouraged the handset
            makers to not make it available, they want you to use EVDO.

            But even before the iPhone, WiFi has been available for a while, at least
            elsewhere in the world. I used it in Japan three years ago. Verizon is not
            the only game in town and certainly not the only game in the world. So,
            WiFI has indeed been around for a while on smartphones. The US is
            backward in terms of wireless carriers and broadband and their
            respective prices.
            ManoaHI
          • Just a different approach

            Verizon was one of the first telcoms to have wifi. They just chose to use a wifi card instead of a phone. At the time, you could surf and make calls at the same time.
            sirpaul1
          • ... your move to an IPhone

            Perhaps you should read the article you just replied to before making your move...
            roo_z
          • Don't understand your reply

            I did read the article so I don't understand your comment. The article was talking about who rules the roost these days .. phone makers or providers. My comment was meant to highlight that Verizon no longer supports wifi on their smart phones (a commenter implied all smart phones were wifi enabled.) Further, earlier on, Verizon DID have a Samsung smart phone that was wifi capable. This really helps when traveling in Europe or Asia for web and email access. Bottom line: Verizon has shot themselves in the foot by focusing on teenie boppers (text and pix) and leaving business folks out in the lurch.
            keepaneye
          • Verizon will have another smartphone with WiFi

            The BlackBerry Storm 2
            phreakincool@...
      • good comments

        and I think you mean think, not thing in last sentence :)

        The App Store has been a huge success and I have been generous to Apple on my blog about it.

        But don't underestimate the telco's attempt to sell their own apps and use arguments like they do around Skype. Since AT&T offers Navigator, it may wake up and say Garmin, Tom Tom, Google etc cannot be allowed to run location apps on their network. Because AT&T offers Cellular Video and Mobile Music, its device partners should not allow competing video or music services on their own.

        About using Skype on cell network...countless reasons to consider it. If you are in street in Romania and want to make a call back to US, AT&T expects over $ 3.50 a minute on its locked iPhone SIM card. Of course, if you are near WiFi use that but what if you are not?

        But my basic point was the Feds have to watch for a much larger national interest - which Apple does not. They should be benchmarking speeds, prices, coverage against the best mobile service in the world - Korea, Nordic countries etc and pushing and prodding AT&T, Verizon etc to do better.

        Let's face it the last admin FCC was too cozy with the telcos and allowed massive consolidation. Now it's time to push them to global standards since we have given them a chance to scale.







        vmirchan
        • Let's not forget the value of 3G-4G in areas where WiFi does not exist.

          However, these 'always connected' folks may pay a bit more than the average folk if they need to call anyone from the Mojave desert in Ca!

          For the rest of us...it just works! Like my MacPro with OS X!!
          No More Microsoft Software Ever!
          • try finding 3G in Mojave!

            check out ATT 3G coverage on this map

            http://www.wireless.att.com/coverageviewer/

            Pretty darned limited around the country. Forget Mojave.

            That is my point. Apple cannot push AT&T into expanding network coverage. But as a country - and this where the Feds come in - we should be asking after 9 years of 3G how come rural and other communities still do not get the coverage. 9 years of incentives to roll out 3G.

            We should be asking why it costs $ 3.50 a minute calling back from some countries on a locked AT&T SIM card on an iPhone when on Skype or a local mobile provider it is a fraction of that cost.

            So let the Feds do their stuff. Let's not pretend Apple can change our mobile landscape in every aspect.
            vmirchan
          • Did YOU look at the map?

            The majority of the locations marked on that map that listed
            "No coverage" happen to be extremely rural locations where
            almost nobody has full coverage. I don't deny that some
            services cover some areas better than others, but where I live,
            ONLY AT&T/Cingular covered where I needed it, so that
            somewhat counters that particular argument.

            On the other hand, none of the providers should have holes in
            their service... except perhaps in areas where the population is
            less than 5/square mile. That's not just AT&T, but every single
            service provider; right?
            Vulpinemac