Tuesday, June 9, 2009

How AT&T is Turning Their Golden Egg Into a Black Eye

With the news for Apple's WWDC, and the announcement about the various features that will be available with iPhone OS 3.0, it's worth noting the growing outrage with iPhone's exclusive carrier AT&T. Since the launch of the iPhone, US carrier AT&T has had a golden ticket -- when Apple and AT&T reported results for Q1, Apple reported a record quarter and AT&T increased their subscriber base despite successfully pissing off a noticeable chunk of their base. I don't remember the specific details -- but you could pretty easily read the numbers as, in a down quarter and a down market, Apple's iPhone saved AT&T's quarter.

However, it's starting to look like AT&T, their network and their policies are becoming an increasing loadstone on the iPhone. Here's a post from Techcrunch following today's announcements at the WWDC keynote: Jason Kincaid writes AT&T Fails iPhone Users Once Again,
MMS and Tethering — two features that have been readily available on many smartphones for years — are finally making their way to the iPhone. But if you’re in the United States, you won’t be able to use them for at least a few months. Because AT&T, the network with an exclusive lock on the iPhone in the US, couldn’t get it together in time to support them for the iPhone 3.0 software launch.

At launch on June 17th, MMS is going to be supported by 29 carriers, and tethering will be supported by 22 of them. So when can we finally expect these stateside? MMS is apparently coming “later this summer”. And tethering? A much more nebulous (and ominous) “later”.
AT&T also blocks some applications from accessing certain functionality when using their cellular network. Some streaming video applications work great on the iPhone -- if you're on a Wifi connection -- or you happen to be using a phone from some other international carrier -- but they don't work on AT&T's cellular network. Cellphone carriers using their network control to "restrain" phone functionality isn't new, Apple cited that as an issue for them with their first forray into an iTunes compatible phone, but it's a frustrating barrier to users who want take full advantage of the product that they bought.

Another great Techcrunch post comes from MG Siegler. In Why The iPhone 3G S May Be A Sucker’s Bet Right Now, he writes,
While current iPhone owners last year got to upgrade to the iPhone 3G for the fully subsidized $199 and $299 prices, the same will not be true this year. Instead, current iPhone 3G owners only 1 year into their 2 year contracts, will have to pay $399 and $499 to upgrade. The reason for this is simple: AT&T subsidizes the phone down to $199 based on a 2-year payment agreement with the customer. If you only paid one year of that contract, AT&T would have to eat those costs. So instead it’s putting that cost back into this new phone.
Siegler goes into greater detail explaining how, in the classic take-money-now-lose-customers-later, despite well-publicized service problems that have created widespread, public customer dissatisfaction, AT&T appears to be focused more on trying to capture dollars rather than customer loyalty. And while the carriers have a long history of conducting these turf wars, tolerating a percentage of churn while leveraging their networks, exclusivity and long-term contracts to profit without regard to actual quality or their customers' interests, AT&T's burn-the-customer strategy hangs on maintaining exclusivity on the iPhone. If you thought that negotiating broadcast rights to the Superbowl was a big deal, my guess is that you haven't seen anything compared to the backroom negotiations going on over the iPhone.

But back to the marketing / word of mouth aspects of this whole deal. If you want to see the level of passion that AT&T is stirring up, read the comments from the two posts that I linked. The commenters aren't just angry, their mad as hell. People often comment about how passionate/enthusiastic/loyal Mac users are -- increasingly, these people are finding a target. Remember how, years ago, people at MacWorld booed when Steve Jobs mentioned signing a deal with Microsoft? This is worse. While you can't throw a rock without hitting someone who either has an iPhone or wants one (at least around here), ask anyone with an iPhone and they'll probably raise AT&T's service as their top complaint -- or at least in the top 3.

Does the Customer Really Matter?
The funny thing about marketing when your dealing with certain organizations is that the equations -- or at least the way that people view them -- change. In the case of the telecom carriers like AT&T, my experience is that they don't look at see the market through the lens that you might typically use. Instead, they see a market that isn't really changing, that isn't really going away. There is no competition, and time just means more money for them. For the carriers, customers aren't customers in the traditional sense, they're more like dirt for a farmer -- a collective pool that you harvest revenue from. It's also why you can find a number of studies about customer satisfaction, churn, and the cost of winning back a customer. In those models, revenue can be maximized by pushing you to the threshold of tolerance, then when you get upset, offering you a cookie or some other small token to reduce your hostility.

And in the long-term, they've been proven right. In the days when broadband was emerging and people where touting the potential of the CLECs to transform the industry, the ILECs held to their game with a multi-tiered approach to crushing the competition. And when the CLECs died, it wasn't just a business or some metaphorical idea of competition, it was the heart of broadband in the US -- innovation and enhancement. Innovation isn't profitable, running a network that does the same thing without any real cost is -- that's why bandwidth hasn't really increased since 2001 -- and why the US has shifted from a broadband leader to one that follows some third world countries.

Like Quantum Theory, Some Economic Ideas Don't Always Behave the Way That You Would Expect
During a recent hearing on the banking crisis, Alan Greenspan admitted that he he was wrong, that ""I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms." Like Alan Greenspan's belief in the power of the market, many people believe that competition and some inherent need to keep the customer happy will prevent companies from engaging in behavior that alienates customers.

Take Dell as an example -- they engage in practices that make customers angry, customers get angry, publish, and their reputation for poor customer service starts impacting their business bottom line. Their response is to aggressively target customer perceptions and the create programs to target dissatisfied customers. But, even for a market leader like Dell, the PC industry is very competitive, and the barriers preventing you from switching vendors isn't very high.

That's how the market is supposed to work. But what happens when your only choice isn't really a choice? When your options are limited, vendors tend to use that to their advantage. Consider the current debate over health insurance as an example. Suppose you have what is currently being referred to in the media as a "good health insurance" plan. What choice do you have when your health insurance provider tells you that they aren't going to cover a medical procedure, even though it's standard and necessary? If work for a business that provides health insurance, then you were probably presented with a list of plans to choose from during an open enrollment period, and once you've chosen, your stuck with that for a year. While there are, theoretically, competitive factors at play -- maybe the provider had multiple plan options or the company that you work for had several providers to choose from -- the abstract model of being in a market where you have different stands to purchase from really falls flat. Instead, you find yourself forced to trade at a booth where, despite changes in the market, you're left with whatever offering and terms that you are given by the merchant.

Why The iPhone Makes You Even More Angry at AT&T
One word -- Software. The iPhone supports software (sure a bunch of other phones have as well, but the iPhone opens the phone as a software platform in ways that were simply not done in the past). The other day I was thinking about the world pre-iPhone. Remember when all of these "futurists" talked about people using "smart phones" to do everything they did on computers... on a phone. Unfortunately, even the best "smart phones" were good phones but really crappy anything-elses -- sort of like early DOS or Windows PCs. What that meant is that, even for the people with "smart phones", they didn't really do much smart, network intensive things. But the iPhone is different, because it's real strength isn't the phone. In that same context, the iPhone is an excellent media player, mobile web browser, portable game system, with email and software support, and a mediocre phone.

My guess is that nobody at AT&T anticipated how big of an impact the iPhone would have on their network -- that people would pick up their iPhones and use them ALL THE TIME. In some respects, this is the same factor that drives the complaint about battery life on the iPhone -- people use the device all the time. If your sitting around and you have a free moment, you're probably using your phone, doing something that involves either wifi or the cellular network, running your processor and display, and chewing up your battery. Compare that to someone that just has a phone -- it sits idle a lot. All the time also means that, if there's a problem with the phone, you're more likely to notice it, that small problems loom larger because you encounter them more frequently -- using my Blackberry, I can probably count the number of times that I actually used copy-and-paste on two hands, but with the iPhone I've probably needed copy and paste two or three times the Blackberry number.

The Funniest Thing About The iPhone Competition Discussion
You know, it used to be that cell phone carriers trapped their customers and made it difficult for them to switch. That's when they passed the number portability regulations, so you could easily switch between carriers without losing your existing number. And, in the old, pre-iPhone days, you could count on similar models of phones at most of the major carriers, so while you might get variations on features, you could switch without too much of a loss. It's only now, when there is no equivalent to the iPhone that you're put back into a situation of being forced to endure a specific carrier's service. If there were truly a competitive match to the iphone, you might be able to switch.

When all is said and done, AT&T probably won't be doomed by their failure to keep some chunk of their iPhone customer base happy, but there is a storm building. I have to believe that Apple is sensitive to the issue -- the carrier, their network, and their business practices are all integral to the iPhone product, and if you had a window into the product roadmap, you'd expect that cellular network is an aspect that's being tracked. In one respect, this seems like a battle between AT&T's traditional cellular carrier mindset (we control the features that get implemented on products that use our network) versus Apple's PC industry mindset (we innovate to match the customer's needs and stay ahead of their interests, and we demand that our support infrastructure keeps up). Down from Above versus Up From Below?

Finally, to quote the Siegler post,
If I learned tomorrow that AT&T and Apple were ending their exclusive deal in 2010, there is no way I would upgrade. I’d suck it up and wait for a year.
AT&T, your customer base is speaking, don't make me quote the Verizon tag line.

No comments: