Monday, January 17, 2011

Why the Verizon iPhone is a Huge Blow to AT&T

There's finally going to be a Verizon iPhone and Apple fans will have a choice of carriers to choose from in the foreseeable future.  And maybe, finally, iPhones will work for making phone calls.  So this is great news for anyone who has suffered with AT&T's terrible service, and high prices, for many years.

In a lot of ways, it seemed inevitable.  Why should the iPhone, unlike virtually every other popular phone, not be offered on every carrier?  Surely the blame falls on Apple, which made an exclusive deal with AT&T, and renewed it at least once.  Besides, the Android pretty much does everything the iPhone does, and it's already offered on multiple carriers.  So iPhone is just catching up with the Android.  Other than a few years of needless suffering by iPhone users under AT&T's thumb, it's no big deal?  Right?

No, it's a huge deal.  Because the iPhone wasn't just any phone.  Behind the scenes, the iPhone represented a huge war between Apple and the major cellular companies.  Apple won.  And AT&T lost.  So did Verizon, ironically, by having to cave in an beg for the iPhone.  But the biggest loser is undoubtedly AT&T which comes out of this battle very bruised, beaten, and unlikely to fully recover.

To understand why, you have to understand AT&T's historic business model and why the iPhone was such a threat, and why an unleashed iPhone is even a bigger threat.

First, AT&T's business model is making sure customers have no choice but to use AT&T, regardless of service or prices.  This is deeply ingrained in their tradition, and despite anti-trust laws, court orders demanding common carriage and being unable to keep up with changes in technology, this is still their primary (and perhaps only) business strategy.  A wonderful book called "The Master Switch," which I have mentioned before, neatly outlines AT&T's history of monopoly practices.   These include buying up competition, suppressing technology, defying court orders, and dirt tricks against both customers and business rivals.  But even more importantly, AT&T used its connections with the Federal government to lobby for anti-competitive policy.  And for a time, from the 1920's to the 1980's, "Ma Bell" even had a legal government approved monopoly.  It certainly didn't hurt that AT&T assisted the government in whatever wiretapping and spying on citizens was deemed necessary.

It was argued at that time (which was just after and then in the middle of world wars and then a cold war) that competition in such a critical service wasn't a good thing.  It was also argued, that by giving AT&T a monopoly, America ended up with the best phone service in the world.  But in fact, there was no reason America, a rising economic giant, shouldn't have great phone service regardless.  And as "The Master Switch" points out, the price that was paid in lack of innovation (AT&T suppressed magnetic tape recording technology back in the 1940's and cellular phone service in the 60's) was not worth the price.  America probably threw away at least a twenty year technological lead on the world thanks to AT&T's paranoia of losing control over its customers.  Not to mention, decades of needlessly high long distance rates.

But even with a legal monopoly, AT&T's position as the gate keeper for all American communications became increasingly threatened by not only changes in technology, which allowed numerous ways to get around their control, but also by their own heavy handed (i.e. illegal) business practices.  There is no such thing as a benevolent dictatorship, because new and stronger enemies will always surface that must be crushed.  Satellites and microwave transmissions provided ways around AT&T's control of land lines, and the rise of the computer created powerful technology rivals.  By the 1960's AT&T's illegal business practices in maintaining it's monopoly control were so egregious that it was just a question of time before it had to be reined in.  Though it took another twenty years of court action, the Federal government finally forced it to break up into pieces in 1984.  Such an ironic date.

But it didn't take long for a diehard AT&T exec named Edward Whitacre to try to reconstruct this monster, nor did it take him long to do it.  Before any real competition was created, Whitacre quickly reversed the forced breakup by simply buying back up the pieces.  He returned to the standard business model of suppressing competition through dirty tricks, and more importantly, Federal lobbying.  By the time the last Bush administration took office, with more interest in spying on citizens than encouraging communication competition, Whitacre had reversed almost all the anti-monopoly restrictions placed on AT&T and had almost completely resembled the original monolith.  Just to make sure there was no confusion, he even bought back the much tarnished name.  He then retired with a $200 million dollar bonus.  

Which brings us to today.  AT&T's current executives obviously want to follow in the footsteps of this effective, if questionably legal, tradition of making sure customers have no choice but to buy AT&T service and pay what AT&T wants.  (They also want to follow in Whitacre's non-traditional emphasis on huge executive bonuses.)  Yes, there is technically some competition.  While AT&T owns all the phone land lines for much of the country, there is Verizon (also made up of former Ma Bell pieces) and a couple minor competitors for cell service.  There are also cable companies, which have a separate line into many people's homes.

But this "competition" isn't meant to be real competition.  Instead of Ma Bell's original monarchy over telephone service, the new telecoms would jointly rule in an Oligarchy over a larger kingdom that included not only phone service, but also once forbidden data services, cellular and cable television access.  Smaller rivals would be tolerated until they could be bought out, or crushed the old fashion way by anti-competitive practices, or if that didn't work, Federal regulation.  At the end of the day, two, or maybe three, victors would remain, with AT&T being the leader, and collusion between them to fix prices and stifle future competitors.

Where does the iPhone fit into all this?  Well, it's a game changer, and a serious challenger to AT&T's desire to be the gate keeper of information and communication.  The iPhone interface imposes itself between the customer and AT&T.  It provides services (like iTunes) that AT&T does not profit from.  It can even be used without AT&T (through wi-fi or simply as a pocket computer).  In other words, it turns AT&T into a "dumb pipe."  Or worse.  It is, in fact, everything rolled into one that AT&T fought against throughout its long history of monopoly control.  It was a technological baby that needed to be strangled in the cradle.  Now, it's too big to stop.

So why did AT&T allow it to happen?  Well, it didn't.  The original Apple deal was made with Cingular, which at the time was an independent company which hadn't been completely sucked up by Whitacre.  If it had been, it was unlikely AT&T would have made the original deal and opened the door to its own potential demise.  Verizon, for example, originally refused to make an iPhone deal unless Apple allowed it to impose itself on customers through the interface.  

Once the deal had been made, though, it quickly became clear the iPhone was a smash success, and, if there had been any doubt, clearly a serious threat.  AT&T had two choices at that point, to try to destroy it, or to embrace it and keep monopoly control.

The problem with destroying it was that Apple is a big, profitable company with plenty of lawyers to protect it.  AT&T's normal strong arm tactics, which served it well in the past, wouldn't have worked.  Moreover, if AT&T stopped providing service, Apple could easily jump to one of the smaller services or even theoretically build its own service

Since the genie was already out of the bottle, the only other alternative was to work closely with Apple, and make sure the device never got offered on any other service.  This could have been done simply by providing great service, at a low enough cost that there would be no need for alternatives.  Apple has never been one to shy against exclusive arrangements as long as it gets what it wants out of them.  And it was pretty clear Apple had no interest in becoming a telecom.   Unfortunately, it would require AT&T to embrace the idea of being a dumb pipe, something they were adamant against.

Presented with only two logical alternatives, AT&T's current executives decided instead to do neither and take the worst possible path.  They didn't stand in the way of the iPhone, but also didn't embrace it.  Instead, they milked it for all the short term profit they could, essentially selling way their future.  They failed to invest in the infrastructure necessary to service such a popular device, over charged for its service, and pissed off Apple enough that it ended its exclusive relationship.  But heck, in the meantime, they took home huge executive bonuses.  For all of her faults, the old Ma Bell at least understood that short term profits had to be sacrificed to build infrastructure so as to control the future.  The iPhone represented the future, and AT&T apparently had no plan to deal with it.

It's important to understand that this is the first time in AT&T history that it has lost monopoly of control over a piece of important technology or an important service without the Federal government forcing it to.  Once AT&T took control of local service in an area, it never lost it.  Once it took control of long distance service, it never lost it.  Likewise with the manufacture of phones, etc.  It was only when the Federal government stepped in and said, "you've gone too far" has AT&T ever lost control.  And even then, it usually regrouped and found a way around the regulations or court orders.

But in the case of the iPhone, AT&T has now lost a significant monopoly simply because it was poorly managed.  And it was not a monopoly it could not afford to lose unless it is willing to be simply a common carrier, which its executives have frequently said they will not be.

Verizon too, is the loser.  AT&T allowed the iPhone to become so big that Verizon was forced to agree to the terms Apple original insisted upon.  It now is only left with one option, to embrace the iPhone and try to compete simply by providing the best "dumb pipe" service.

The success of the iPhone has also opened the door to the less threatening, but still threatening Android phone.  Unlike the iPhone, the Android allows carriers to impose themselves between Google and the customer by "customizing" the operating system, but it also opens up a world of choices and services that the telecoms originally hoped customers would not have.

Theoretically, the 1984 Federal court order broke up AT&T and ended its monopoly control over American phone users.  But in the long run, Steve Jobs famous 1984 release of the Macintosh, which introduced a new way of computers interacting with people, was equally important.  Interface advances in the Macintosh paved the way for the iPhone.

Because the truth is: AT&T's monopoly didn't really end until the iPhone shattered it.

1 comment:

  1. Att losing the iphone is good for consumers, seeimg how it forced att to upgrade their phones and network. Recently after they lost excludiity they started setting up 4g network and has now opened up the droid market on the newer phones. While it is not much it might spark a new battle between verizon and att, which in the end we win.