The iPhone was a ‘great success’ for AT&T initially, but they made a couple of crucial mistakes that changed how all carriers are perceived and all the carriers negotiating power. Pre-iPhone, carriers were in control, they could accept and reject any phone, push out requirements to manufacturers and control the whole process.
- Want VoIP in your phone? AT&T the carrier could ask for custom software.
- Want WiFi enabled on your phone, the carrier can ask for it to be disabled.
- An App Store? No Thanks, the carriers were trying to build their own app stores following the successful Docomo model in Japan.
- Update your phone software… sorry, that’s controlled by the carrier too.
In fact, if the manufacturer wanted a phone to be subsidised by a carrier they usually had to customise the phone software in some way, otherwise a Vanilla version meant the customer would have to pay full price. If a phone was ‘in demand’ negotiations over customisations may be easier. Effectively, the carrier wanted to own the customer, afterall, they held the customers billing details, and importantly their phone number.
So what did AT&T do wrong?
- Mistake 1 is the well documented unlimited data at $30. This effectively anchored a whole industry to a price point that was not sustainable. Before this offer came about, it was not possible to get an unlimited data plan. It caused an ‘arms’ race between carriers which meant increased capital expenditure costs in building up enough bandwidth to cater for unlimited data usage and half opened the door to over the top services.
- Mistake 2 is subsidising the iPhone too much. The subsidy for the iPhone ate into their profits and their profits increased after sales of iPhone decreased from 4.3M to 3.7M units from Q1 to Q2 2012. The subsidy and corresponding price that AT&T agreed with Apple, and the success of the iPhone anchored the expected price customers would pay for the iPhone. This affected all carriers.
- Mistake 3 was giving control of software updates to Apple. Previously, all software updates were controlled by the carrier. AT&T gave this control over to Apple. The original iPhone did not have an App Store, “Web Apps would have done”. But Apple could upgrade all iPhones and push an App Store that they controlled. All carriers who were trying to build their own app ecosystems were pushed out of the way in one fell swoop. AT&T gave away app store control and made that decision for all carriers. Over the top services (such as whatsapp, Line, Wechat) took advantage of this because no carrier owned App Store would ever approve these type of apps.
- Mistake 4 was ceding activations to Apple and ownership of the user. Previous to this, who “owned” the user? The carriers effectively controlled the user because they had their phone number, and they had the billing relationship. Activations and the App Store ecosystem ensured Apple could move in and take ownership of the customer away from carriers.
One of AT&T’s requirements for the iPhone was am attempt to control media sharing by locking down Bluetooth. Ring tones were big profit earners and they didn’t want people to be able to easily share music files and make them into ringtones. With control of iTunes, this was not important for Apple.
These main strategic errors by AT&T affected all carriers and led to, price anchoring for unlimited data, over the top services, profit reducing subsidies and the battle of ecosystems that is all about who owns the relationship with the end user.