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AT&T'S IM ESS
By Roben Farzad
l l l u s t r a t i o n y M a t tM a h u r i n b

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Inmid-December,Fake Steve the alter egoof widely Iobs, read journalist and blogger Dan Lyons,postedthe folIowing appealto his fellow membersof iPhoneNation: "On Friday,Dec.r8, at noon Pacifictime, we will attempt to overwhelmthe AT&T data network and brins it to its knees.The goal is to haveevery iPhoneuser(or asmany aswe can)turn on a data-intensive app andrun that app for one solidhour. Sendthe message to AT&T that we aresick of their substandard network. ... |oin us andspeaktruthtopower! Soonthousands hooligans-orif of " you prefer,frustratedcustomers payingAI&T asmuch asgr5o per month-took to Twitter andFacebook join up. to OperationChokeholdmight havebeen a landmark consumeruprising had the federalgovernmentnot steppedin. Two daysbeforethe plannedprotest,famieBarnett,the FederalCommunicationsCommission's chief of public safetyand homeland security, issueda statement warningthat to "purposelytry to disrupt or negativelyimpact a network with illintent is irresponsibleandpresentsa signiflcantpublic safety concern."Doing so could interferewith 9tr calls.Fearinga publicity,the Chokeholders boomerang ofnegative calledoff the stunt,butthepopularbacklashagainstAT&Tragedon. On the Dec.zobroadcast NBC'sSaturdayNighf ,Liue, Weekend of new phone UpdateanchorSethMeyersnotedthat Google's might poseathreattoApple'siPhone andadded: "Alsoa chalIenge the iPhone:makingphonecalls." to AI&T hasstumbledinto a quagmire. When it secured exclusiverights to supportApple'siPhoneon its wirelessnetwork in |unezo07,investors hailedthedealasa masterstroke. Herewasstodgy,safeAT&T positioningitself to gulp proflts
3 4 I B L O O M B E R G U S I N E S S W E E KF E B R U A R 1 5 . 2 0 1 0 B Y

The iPhone has swampedits data network and sparked a consumer rebellion. What can Ma Belldo?

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Wirelessoperatorsare to struggling keep up with demandas more people use their phonesto check Facebookand watch videos online.Here are estimates is of how much bandwidth used per personfor various activitieson differentphones. One megabyteis roughly to equivalent one digital book,45 secondsof music, or 20 secondsof mediumqualityvideo. Phones suchas the Motorola to Razrareusedprimarily make calls, theyconsume and evenfor Web littlebandwidth theyhave because activities Web browsers. stripped-down VoiceGalls:4 MB oer hour suchas Smartohones popular In Research Motion's are BlackBerry usedfor phone and calls, e-mail, lightWeb browsing. VoiceCalls:4 MB perhour Advanced smartphones, iPhone and Apple's including Droid,makeit easy Motorola's to for people surfthe Web and to videos, leading watchonline use. muchhigher bandwidth VoiceCalls:4 MB per hour Web Browsing:40 MB

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from a cutting-edge technology.But AT&T and Apple vastly the underestimated iPhone'sappeal.At launch, RealSteve |obssaidhe'dbehappyif the devicecould grabr7oof the global market,or aboutro millionunitsfor zoo8.Instead, cell-phone Applehas soldatleast 4z.4million-z5.tmillioninzoo9 alone, r4Eoof the global smartphonemarket. AT&T, which markets the iPhone inthe U.S.,simplycan'thandlethetraffic. Making mattersworseis the proliferationof "apps,"those bandwidth-sucking programsthat make smartphonesso AccordingtoApple,iPhoneusershave much smarter(table). at downloaded leastt4o,ooo differentappsa total of 3 billion games times. Watchingbroadcastsof Major LeagueBaseball Earthonapalm-sizedevice andstudyingtheglobevia Google feelslike a promisefrom the future, but the networksdelivering all this dataarestill just catchingup withthe present."We this wasgoingto openup a new levelof engagement, expected in and we knew we'd be successful the market,"saysAT&T OperationsPresident]ohn Stankey. "We missedon our usage for he in estimates." Case point: It's not atypical, says, 8olo of a collegefootball crowd to be usingtheir iPhones. Nation-withits media-sawy anddataTheriseof iPhone greedycitizenry-has Ieft AT&T with a tough set of options. It could significantly upgrade its network to handle all the new demand,but that would cripple profits. It could charge can do on or more for network access limit what customers their phones,but that would enragethe all-you-can-eat
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baseas well as Net Neutrality types who seekto subscriber preventtelecomcompanies from dictating customers'options. It could permanentlyhalt iPhonesalesin overcrowded markets,but that wouldbring more mockery,not to mention ac placeAI&T in the unusualposition of denyingconsumers to cess a productit doesn'tevenmake, To keep its uneasyequilibrium, AT&T is trying a little of capacitywhile trying everything:It's marginallyincreasing network hogsand subtly reshapethe definition of to squeeze Net Neutrality. BtowrNG KrssEs So far the gambit has paid off. On fan. 28, AT&T said its fourth-quarter profit had risen z6Vofrom zoo8 and that it in had added7.1million wirelesscustomers zoo9, equaling its most everin a singleyear.What's more,Applehasn't lost faith; when it unveiled its iPadtablet PC in fanuary,it said it had given AT&T the exclusiveright to provide data service' that AT&T can't lock cusBut this time Applehasstipulated tomersinto servicecontractsfor the iPad,making it easierfor them to bail if another carrier starts offering service. That'swhererivalVerizoncomesin. The NewYork-based to carrierhasbeenblowing kisses iPhoneusersfor months, signalingthat it's readyto servethem assoonasApple wants to make a deal.Verizonis alreadyracing aheadof AT&T in upgrading its slow copper wires to fast fiber-optic lines

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that carry FiOS,its bundle of telephone,Internet, and televisionservices. conBy trast,AT&T'scompetingUVerse service, which runs over a patchwork of fiberoptic and copperwires,has gained little traction. The iPhone was supposed to be the great equalizer for AT&T, but since the launch inzooT, AT&T's stock has underperformed Verizon's Devices such as Apple's newly points and by rz percentage unveilediPad are likelyto send the Standard Poor's5oo& data use even higher.The stockindexby six. iPad will chew up even more bandwidththan the iPhone For AT&T CEO Randall because of its larger screen. managingone Stephenson, divisionfor growth and anWeb Browsing: other for costsis "a delicate 50 to 60 MB perhour and very tricky balance/' saysZhiping Zhao, a teleN e tR a d i o : 6 0 B M com specialist with New YouTube Videos: York-basedresearchfirm 300 to 400 MB CreditSights. "And if AT&T it doesn'tfind that balance, doesn't growJ'Adds Gerard Hallaren, director of researchat TownHall Investment Research Littleton, in Colo.:"It's a jugglingact." AT&T saysthe usage issue is broaderthan onecompany, don't think there'sbeenany "I significant shift in consumertechnologythat hasn't come with growing pains," saysStankey."Think back to America It's Onlineandbusysignals. not that theseproblemscan't be solved-it's that mobile is a different game."

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kee Group,haveplacedAT&T last in customersatisfaction amongmajor carriers. When AT&T suggested December in that somecustomerswereusing too much bandwidth, it failed to anticipatethe backlashthat would follow. Business schoolsarelittered with casestudiesof companies that havepaidthe price for insensitivity to customers'*ishes. (New Coke,anyone?)The perils haveonly increased an erawhen it's easytomakecomplaints in heardglobally. Apple,for one,hadto dealwithits owncustomer-service crisisin zoo3whenbrothers CaseyandVanNeistat of New York discovered that their iPod batterieswere irreplaceableand lastedjust t8 months. They made a film called tPod'sDirty Secreland launcheda protest Web site that drew problem.And millions of hits, afterwhichApple addressedthe following the success Supe Size r of Me, in which documentarian Morgan Spurlock chronicled his decline in health while eatingmealsonly at McDonald'sfor 3o days,the fast-food chain did awaywith its SuperSizemealoption. Companies from PepsiCo Facebook to havealsodiscovered powerof the consumersin changingeverything from products to privacy policies.A zoog studybyKeller FayGroupinNew Brunswick, N, |., found th al only zz7oof. conversations about a brandrefer to the company'sadvertising,Sayscustomerserviceconsultant feanneBliss:"The marketing message no longerunder is a company'scontrol, We trust other customersfirst." The most vulnerabletargetsare often companies such as AT&T that havean ongoingrelationshipwith their customers.Lockedin by long-term service contractsandpowerless overeverythingfrom network failuresto wait times for reaching a human being in customercare,subscribers easily are frustrated. "The telecomindustry hasbeen a laggardrelative to other industrieson the customer-service front," says MacklinMartin, directorof consultingat InternationalCustomer Management Institute in Colorado Springs. points He to the high costsof maintainingthe network and customer support,combined with intense competition,asfactors. "It's a diffrcultbusiness modelto maintain,"Martin says. Amongthe angriestcustomers fohn Rust,a freshmanat is PatrickHenry College, Christianschoolin Purcellville, a Va. MA BELL BACK IS and an- Rustis oneof the ThreeMusketeers, splintergroupformed a Today'sAT&T, with nearly joo,ooo employees nual salesof gtz4 billion, is in somerespectsa remarkable from the Operation Chokeholdcampaignfor the purpose turnaround story.After the historic dissolutionof Ma Bellin r984, Southwestern regionalBells Bell (SBC), one ofthe seven created afterthe breakup,spenta quarter broken-off pieces century reassembling of CEO underthe stewardship deal-happy of EdWhitacre(nowchief executive General Motors).By zoo6, havingrolled up four of the oriEinalBellsand the remains itself AT&T and returned of pesteringAT&T. Outside class,the soft-spoken,polite of AT&T proper,SBCrechristened -works 19-year-old-he closes e-mailswith "Blessings" his to usingthe iconic stocksymbolT (for telephone). for Ma Bell was back. Then camethe iPhoneand its arrayof as a video editor and Webdesigner a localfllm company. profitssoared, at a cost. After purchasing iPhonein September an zoo8, Rustsays, he apps.Wireless but network-sapping of In DecemberAT&T Wireless said 17o smartphonecus- quickly becamefrustrated with the numerousdeadspotsand tomersaccountedfor zoVoof the datadrain on its network, poor servicequality on AT&T's network. "Unlimited should recentsurveys, be unlimited/'he says."When I bought my iPhone,I signed while its top JVo wereusingup 4o7o.Several firm Yan- a contract with AT&T. Thev haven't upheld their end of the including thoseby ConsumerReportsandresearch
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as much as gz billion. "We think it's a start, but not much more than that," says TownHall's Hallaren, who contendsthat AI&T would haveto spend95billion to 97billion to bring its network up to Verizon's quality. AT&T rejects an apples-to-apples comparisonwith Verizon. "For someone sit outsideour business to and try to derive a relative investment value-I can't imagineanyonetrying to do thati' saysStankey. Evenif AT&T were willing to boost its wireless network investment significantly,figuring out precisely how much to spend without sacriflcing profits would be hard. Craig Moffett, a telecomanalystat BernsteinResearch, has analyzedvarious scenarios. His findings: If AT&T were to triple its capital spending on wireless, thevalueof aniPhonecustomertothe companywould be halved.A sixfold increase in spendingwould make all iPhone customers worthless to AT&T. StankeydisputesMoffett's but with "the thought proconclusions agrees that we needa return on capital." cess
In December.Alix filed a complaint against AT&Tover problems with its landlinenetwork

bargain. Simply put, I want what I'm paying for." AT&T's Stankey says: don't thinkyou canhave anunlimitedmodel "I forever with a scarceresource.More people get drunk at an open bar than a cashbar." When Rust joined Operation Chokehold, he linked up with pals Dylan Pine of Nashville and Peter Servenof St. group Louis via socialnetworking. Servenstarteda Facebook and reservedTwitter usernamesand domain namesrelated to Chokehold.Within a few days,thousandsof usershad joined. The Musketeers put togethera central site, drafted marketing material, and traffrc-copped their Facebookand Twitter pages. the final z4 hoursbeforethe plannedoperaIn tion, the Musketeers werefeaturedon CNN. Rustsays isn't he finished. He and the Musketeers working with developers are to createan online mapping service(andpossibleiPhoneapp companion) that lets userspost AT&T deadzonesand poor for serviceareas everyonetosee. Also ontap: organizing"flash mobs" to picket AI&T Wireless stores.All three saythey're eagerly awaiting a VerizoniPhone. Musketeers, Chokeholders, other critics want AI&T and to spendtoimproveits network.Wireless byfar its fastestis growing division, contributing 44Eo total revenuein zo 09, of up from367oin zo07. But overallcapital spendinghasn'tkept pace, fallingfrom gzo.3billion in zoo8 to gt7billion last year. AT&T vowed in |anuary to boost 2o1o wireless spendingby
3 8 I B L O O M B E R G U S I N E S S W E EIKF E B R U A R Y 5 . 2 0 1 0 B 1

LIMITINGACCESS Instead of betting big on new investment or raising prices,AT&T is choosinga aggressively controversialthird way: It's trying to limit the iPhonefeaturescustomers canuse.The company prohibits Webcastsand file sharing on its unlimited data plans, activities someother carriersallow, "We needto be ableto manageour traffrc,"says Stankey."You can't haveeverybodywatching YouTubeduring an emergency." The Net Neutrality movement disagrees with that reasoning. "We're at a critical moment,"saysBen groupthat a Scott,policy directorof FreePress, nonpartisan argues telecomprovidersshouldhaveno ability to limit their ttDo we as a country invest in customerstnetwork access. bandwidth,orthe networktoolsto limit bandwidth?" AT&T alsotakesa hard line on iPhone"tethering," the proto cessby which usershook up a computerto a smartphone gainNet access. Most carriersallow tethering for a small fee. AT&T does,too, but not for the iPhone;instead,iPhonecusmust pay at least g4o a tomerswho want laptop Net access month for a separate mobile laptop deviceand data account. Mackay Bell, a 39-year-old freelancewriter in Los Angeles, sayshe's "pissedoff " that AT&T won't let him tether. "It's ridiculous that I should haveto get a USBtoggle and pay so much extraj' he says. blog, at attcritic.blogspot.com,feaHis turesthe AT&T logoasDr. Evil from the Austin Powers movies. Bellsays hewould jump atthe chancetohave aVerizoniPhone. AT&T saysit plansto offer iPhonetethering,but for now, says onthe fue." Stankey, "Youdon't wantto throwmore gasoline The Mackay Bells of the world wouldn't be so worrisome for AI&T wereits once-mighty landlinebusinessstill strong. But Bernsteinestimatesthat the unit's profit marginswill fall

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cut saythey've had chronic soundproblems with U-Verseand are considering Alix filed switching to cable.In December, a complaintontheirbehalfwith Connecticut'sPublicUtilitiesControlDept.andon RichardBlumen]an. 4 senta letter to StateAttorney General thal. "What was most unsettling to me was that AI&T never seemedtolistento what I hadto say,neveracknowledgedthat the fault lay with them insteadof with our hardwareand wiring, and that they wastedso much of my time j' saysAlix. Yet AT&T can't afford to redoubleits landline efforts now, abiggerwaris flaringup inwireless.Foryears Verizon because hadresistedcutting its wirelessprices,but on fan. r5it slashed the monthly rate on its unlimited calling plan from $99.99 to AT&T quicklymatched offerfor all its cellphone the $6S.Sg. products,eventhe iPhone.The upshot?An iPhonecustomer who had beenpaying 9149.99a month for unlimited calling, now paysjust 9rr9.99. "We Web-browsing, and text service obviously want to remain competitive/' saysAI&T Wireless spokesmanMark Siegel. With customers in open revolt, AT&T's definition of "competitive"-modestly loweringpricesandraisinginvestment spending-might not be enoughto staveoff Verizon. "I'm not awareof any companyin this country that has had so aloof a stancetoward quality of service/' Rich Doherty of The EnvisioneeringGroup, a Seaford(N.Y.)telecom market researchfirm, saysof AT&T. "And that's after two and a half from3zVo today to z67oin three years,which translatesto a yearsof fronting the world's most elegantand entertaining operatingincome.Like handhelddatadevice." $3.6billion plungein that segment's the rest of the telephoneindustry, AI&T is being hit hard by to Maybelosing somecustomers Verizonwouldn't be the the growingshareof households opting for only cellphones.It worst thing for AT&T. Its data network could use a breather. alsohasbeenbuffetedby competition from cablecompanies, And AT&T wouldn't mind seeingVerizonstrain under the which bundle phone serviceas part of their phone, Net, and weight of iPhoneNation. Soonafter OperationChokeholdhit TV packages. Upgradingphone lines to competewith cable theblogosphere, Verizonsignaledthatit wasreadyforApple's isn't cheap.FiOShasgonefrom zerocustomersto business. companies Sureaboutthat?| BwI 3.5million in five years-but to get there,Verizonis investing - With Ar ih HesseldahlandDianeBradv morethan gz3billion in fiber-opticwires.
Rust a student in Virginia, uses social networking to planconsumer protests

TANDLINE FRAYING Giventhe economicsof landline telecommunications, it's little wonder AT&T hasn't made a market-alteringinvestment in its U-Verseservice.The companyhasn't divulged how much it has devotedto date, but saysit has invested lessthan half of what Verizonhasspentper customerhome. CreditSights'Zhao placesthe total U-Verseinvestmentin the vicinity of gto billion. AT&T concedes that it won't be rolling out U-Verse rooToof its homesandwill opt instead to to resellthird-party satellitetelevisionin the homesit isn't rewiring. "Instead ofbundling a good valueproposition to keep customersaway from the cabletriple play, they adopt half-bakedsolutions/'says Zhao.BruceKushnick,chairman group,callsU-Verse"a of TeleTruth,a consumer-advocacy cheapcopperafterthought"and faults AI&T for neglecting its stillsubstantialnumber landline-onlyhouseholds. of Says Stankey:"We're having an awfullot of success something for that's an afterthoughtJ' Not all the feedback beenpositive.AdamAlix, zo, is a has NortheasternUniversity studentwhoseparentsin Connecti4 0 I B L O O M B E R G U S I N E S S W E EIKF E B R U A R 1 5 , 2 O 1 O B Y

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Read, save, and add content on BW's Web z,o tooic network

iNeedYou,AT&T
There It wasn't all oohs and aahs during iPad'sintroductiop. were also groanswhen news broke that AT&Twould be the officialserviceproviderfor Apple's much anticipated tablet computer. But a Jan. 27 anicle in PC Magazine argues that Steve Jobs has five good reasons to stick with AT&T.Here'sone: GSM, the technologyused by AT&T is the most prevalent standard worldwide and is therefore key plans.Another:Verizon, to Apple's international expansion which is AT&T'smain rival,has been supplementingits own lineupof smartphoneswith additionsfrom Android and Palm.So the carriercould probablydo without the spike in data traffic that a host of iPad users would bring, To read the PC Magazine story,go to http://bx.businessweekcom/a ppl e/ ret erence /

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