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AT&T'SESSThe Phone asswamped tsdatanetworkandsparkeda consumerrebellion.WhatcanMa Belldo?

network andbrins it to its

Inmid-December,FakeSteveIobs, he alter egoof widelyread ournalist and bloggerDan Lyons,posted he fol-Iowing appeal o his fellowmembersof iPhoneNation:"On Friday,Dec. 8, at noonPacific ime, we will attemptto overwhelm he AT&T dataknees.The goal s to haveeveryiPhoneuser or asmany aswe can) urn on a data-intensiveappand un that app or onesolidhour. Send he messageoAT&T that we aresickof their substandard etwork. .. oin usandspeaktruthtopower!Soonthousandsfhooligans-or fyouprefer, rustratedcustomers ayingAI&T asmuchasgr5opermonth-took to Twitter andFacebooko oinup.OperationChokeholdmight havebeena andmarkcon-sumeruprising had he federalgovernment ot stepped n.Two days efore heplanned rotest, amieBarnett, he Fed-eralCommunicationsCommission's hief ofpublicsafetyandhomeland ecurity,ssued statementwarning hat to "pur-posely ry to disrupt or negatively mpact a network with ill-intent is rresponsibleandpresentsa signiflcantpublic safetyconcern."Doingso could nterferewith 9tr calls.Fearing

boomerang fnegative ublicity, he Chokeholde rsalledoffthestunt,but hepopularbacklashagainstAT&Tragedon.nthe Dec. obroadcast fNBC'sSaturdayNighfLiue,WeekendUpdateanchorSethMeyersnoted hat Google's ew phonemightpose threat oApple's Phone ndadded: Alsoa chal-Iengeo the Phone:makingphonecalls."AI&T hasstumblednto a quagmire.When t secured x-clusive ights o supportApple'sPhoneon ts wireless et-work n |unezo07, nvestors ailedthedealasamasterstroke.Herewasstodgy, afeAT&T positioningtself o gulpproflts34 I BLOOMBERGUSINESSWEEK EBRUARY5 .2010

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RUTHANDWIDTHperatorsareo keepup withas morepeoplephones o checkand watchvideosHereare estimatesmuchbandwidthsper person or variouson differentphones.

emegabyte s roughlyo one digitalseconds f music,of medium-ideo.

Phones uchas heMotorolaRazr reusedprimarilyomake alls, nd hey onsumelittlebandwidth ven or Webactivities ecauseheyhavestripped-downWeb browsers.VoiceGal ls:4 MB oerhour

SmartohonesuchasResearchnMotion's opularBlackBerryreused or phonecalls, -mail, nd ightWe bbrowsing.

Voice Cal ls:4 MB perhour

Advanced martphones,includingpple'sPhone ndMotorola's roid,make t easyforpeopleo surf heWeb andwatch nline ideos,eadingomuch i gher andwidth se .Voice Cal ls:4 MB per hourWeb Browsing:40 MBNetRadio:60MBYouTube ideos:200 MB560MB

WebBrowsing:4o 5 MB WebBrowsing:4o 5 MB

185MB

Web E5 0 t oNet RiYouT300

800li ssiwiOsoMITonutusoBcrce lunt oerfoof.oneInto Iwtin

l0tlMB

Data: Chetan Sharma Consul t ing

from a cutting-edgetechnology.But AT&T and Apple vastlyunderestimatedhe iPhone'sappeal.At launch,RealSteve|obssaidhe'dbehappyif the device ouldgrab 7oof heglobalcell-phonemarket, rabout o millionunits or zoo8.Instead,Applehas oldatleast z.4million-z5.tmillioninzoo9 alone,r4Eoof the globalsmartphonemarket. AT&T,which marketsthe Phone nthe U.S., implycan'thandlethe raffic.Makingmattersworse s theproliferationof "apps,"hosebandwidth-suckingprograms hat make smartphonessomuch smarter table).AccordingtoApple, Phone sers avedownloaded t east 4o,ooo differentappsa otal of 3billiontimes. Watchingbroadcastsof Major LeagueBaseball amesandstudyingthe lobe ia Google arthonapalm-size evicefeels ike apromise rom the future,but the networksdeliver-ing all this dataarestill just catchingup withthe present. Weexpectedhis wasgoing o openup a new evelof engagement,and we knew we'd be successfuln the market,"saysAT&TOperationsPresident ohn Stankey.Wemissedon our usageestimates." asen point: t's not atypical, e says,or 8olo ofacollegeootball crowd o be using heir iPhones.The iseof PhoneNation-withits media-sawyanddata-greedy itizenry-has Ieft AT&T with a oughsetof options.It could significantly upgrade ts network to handle all thenew demand,but that would cripple profits. It could chargemore or networkaccess r limit what customers an do ontheir phones,but that would enrage he all-you-can-eat

subscriber aseaswell asNet Neutrality ypeswho seek oprevent elecomcompaniesrom dictating customers'op-tions. It couldpermanentlyhalt iPhonesalesn overcrowdedmarkets,but that wouldbring moremockery,not to mentionplaceAI&T in the unusualpositionof denyingconsumers ccesso aproduct t doesn'tevenmake,To keep ts uneasyequilibrium, AT&T is trying a little ofeverything: t's marginally ncreasing apacitywhile tryingto squeeze etwork hogsand subtly reshape he definition ofNet Neutrality.BtowrNGKrssEsSo ar the gambit haspaid off. On fan. 28, AT&T said tsfourth-quarter profit had risen z6Vo rom zoo8 and hat ithad added7.1million wireless ustomersn zoo9, equalingits most ever n a single ear.What'smore,Applehasn't ostfaith; when t unveiled ts iPad ablet PC n fanuary, t said thad givenAT&T the exclusive ight to providedataservice'But his ime Applehasstipulatedhat AT&T can't ock cus-tomers nto service ontracts or the Pad,making t easier orthemto bail if another carrierstarts offeringservice.That'swhere ivalVerizon omes n. The NewYork-basedcarrierhasbeenblowingkisseso iPhoneusers or months,signaling hat it's ready o serve hem assoonasApplewantsto makea deal.Verizon s already acingaheadof AT&T inupgrading ts slow copperwires to fast fiber-optic lines

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Devicessuch as Apple's newlyunveiled Pad ar e ikely o senddata use even higher.TheiPadwill chew up evenmorebandwidth han he iPhonebecauseof its larger screen.WebBrowsing:50 o 60 MB perhourNetRad io :60 BYouTubeVideos:300 o 400 MB

800o1,000 B

turnaround story.After the historic dis-solutionof Ma Bellin r984, SouthwesternBell SBC), neofthe seven egionalBellscreated fter he breakup, pentaquartercentury reassembling roken-off piecesunder he stewardship f deal-happyCEOEdWhitacre nowchiefexecutive f Gen-eralMotors).By zoo6, having olledupfour of the oriEinalBellsand he remains

is broader hanonecompany, I don't think there's eenanysignificantshift in consumer echnology hat hasn't comewith growingpains,"saysStankey. Think back to AmericaOnlineandbusysignals.t's not that these roblems an'tbesolved-it's that mobile s a differentgame."MA BELL S BACKToday'sAT&T, with nearly oo,ooo employees nd an-nual salesof gtz4 billion, is in some espects remarkable

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keeGroup,haveplacedAT&T last n customersatisfactionamongmajorcarriers.When AT&T suggestedn December hat somecustom-erswereusing oo much bandwidth, t failed o anticipate hebacklash hat would follow. Business choolsare ittered withcase tudies f companieshat havepaid he price or insen-sitivity to customers' ishes. (NewCoke,anyone )Theperilshaveonly ncreasedn anerawhen t's easytomakecomplaintsheardglobally. pple, or one,hadto dealwithits owncustom-er-service risisn zoo3whenbrothers aseyandVanNeistatof New Yorkdiscoveredhat their iPod batterieswere rre-placeableand asted ust t8 months. Theymade a film calledtPod'sDirty Secrel nd aunchedaprotestWeb site hat drewmillionsof hits, afterwhichApple addressedthe roblem.Andfollowingthe success f Supe SizeMe, n which documentarian Morgan Spurlock chronicled his decline n health whileeatingmealsonly at McDonald's or 3o days, he fast-foodchaindid awaywith its SuperSizemealoption. Companiesfrom PepsiCoo Facebook avealsodiscoveredhe powerofconsumersn changingeverything rom products o privacypolicies.A zoog studybyKeller FayGroup nNew Brunswick,N, ., found th al only zz7oof. onversations bout abrand eferto the company'sadvertising,Says ustomerserviceconsul-tant feanneBliss: The marketingmessagesno ongerundera company's ontrol,We rust othercustomersirst."The mostvulnerable argetsareoften companies uchasAT&T that havean ongoing elationshipwith their custom-ers.Locked n by ong-term service ontractsandpowerlessovereverything rom network ailures o wait times or reach-ing a human being n customercare,subscribers re easilyfrustrated."The telecom ndustry hasbeena aggard ela-tive o other ndustrieson he customer-serviceront," saysMacklinMartin, directorof consulting t nternationalCustomerManagementnstitute n ColoradoSprings.Hepointsto the high costsof maintaining he network and customersupport,combinedwith intense ompetition, s actors. It'sa diffrcultbusinessmodel o maintain,"Martin says.Among he angriest ustomerss fohnRust,a reshmanatPatrickHenry College, Christianschool n Purcellville,Va.Rust s oneof the ThreeMusketeers, splintergroup ormedfrom the OperationChokeholdcampaign or the purpose

that carryFiOS, ts bundleof telephone, nternet, andtelevision ervices. y con-trast,AT&T'scompetingU-Verseservice,which runsovera patchworkof fiber-optic and copperwires,hasgained ittle traction. TheiPhone was supposed obe the great equalizer forAT&T, but since he launchinzooT, AT&T's stockhasunderperformed Verizon'sby rz percentage ointsandthe Standard& Poor's5oostock ndexby six.For AT&T CEO RandallStephenson,managingonedivision or growth and an-other or costs s "a delicateand very tricky balance/'saysZhiping Zhao, a tele-com specialistwith NewYork-based es earch irmCreditSights.And f AT&Tdoesn't ind that balance,tdoesn'tgrowJ'Adds GerardHallaren, director of re -searchat TownHall Invest-ment Researchn Littleton,Colo.: It's a ugglingact."AT&T says heusage ssue

..IDON'THINKtlUCANAVENUNTIMITEDtlDEL

E-oof

of AT&T proper,SBC echristenedtselfAT&T and eturnedto using he conicstocksymbolT (for elephone).Ma Bell was back.Then came he iPhoneand ts arrayofnetwork-sapping pps.Wireless rofitssoared, ut atacost.In DecemberAT&T Wirelesssaid 17o f smartphonecus-tomersaccountedor zoVo f the datadrain on ts network,while ts topJVowereusingup 4o7o.Severalecentsurveys,including thoseby ConsumerReportsandresearchirm Yan-

Ft|REVER,''AYST&T'STANKEY.MtlRE EtlPTEETDRUNKTANlPEN AR HANCASHAR.''of pesteringAT&T. Outsideclass, he soft-spoken,polite19 year-old-he closes is e-mailswith "Blessings"worksasa video editor andWebdesigner or a ocal llm company.Afterpurchasing n Phone n September oo8,Rustsays, equicklybecame rustrated with the numerousdeadspotsandpoorservice ualityon AT&T's network. Unlimitedshouldbe unlimited/'he says. When I boughtmy iPhone, signeda contract with AT&T.Thev haven't upheld their end of the

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bargain. Simply put, I want what I'm paying for." AT&T'sStankey ays: I don't thinkyou canhave nunlimitedmodelforever with a scarce esource.More people get drunk at anopen bar than a cashbar."When Rust joined Operation Chokehold, he linked upwith pals Dylan Pine of Nashville and Peter Servenof St.Louis via socialnetworking. Serven tarteda Facebook roupand reservedTwitter usernamesand domainnames elatedto Chokehold.Within a few days, housandsof usershadjoined.The Musketeers ut togethera centralsite, draftedmarketing material, and traffrc-coppedtheir Facebook ndTwitter pages.n the finalz4 hoursbefore heplannedopera-tion, the Musketeerswere eaturedon CNN. Rustsays e sn'tfinished. Heand he Musketeers reworking with developersto createanonline mapping service andpossiblePhoneappcompanion) hat letsuserspostAT&T deadzonesandpoorserviceareasor everyoneto ee.Also ontap: organizing flashmobs" to picket AI&T Wireless stores.All three say hey'reeagerly waiting aVerizonPhone.Musketeers, hokeholders, ndother critics want AI&Tto spendto mprove ts network.Wirelesssbyfar ts fastest-growingdivision,contributing 44Eo f total revenue n zo 09,up from367o n zo07.But overallcapital spendinghasn'tkeptpace,alling rom gzo.3 illion n zoo8 o gt7billion astyear.AT&T vowed n |anuary to boost 2o1owireless spendingby

In December.Alixfiled a complaintagainst AT&Toverproblems with itslandlinenetwork

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as much asgz billion. "Wethink it's a start, but notmuch more than that," saysTownHall's Hallaren, whocontends hat AI&T wouldhave o spend95billion to 97billion to bring itsnetwork up to Verizon'squality. AT&T rejectsan apples-to-applescomparisonwith Veri-zon. "Forsomeoneo sit outsideour businessand try to derive a relative nvestment val-ue-I can't magineanyone rying to do thati'saysStankey.Even f AT&T were willing to boost ts wire-lessnetwork nvestment significantly, igur-ing out preciselyhow much to spendwithoutsacriflcing profits would be hard. Craig Mof-fett, a telecomanalystat BernsteinResearch,has analyzed ariousscenarios.His findings:If AT&T were o triple its capital spending onwireless,hevalueof aniPhone ustomertothecompanywould be halved.A sixfold ncreasein spendingwould make all iPhone customersworthless o AT&T. StankeydisputesMoffett'sconclusions ut agrees ith "the thoughtpro-cesshat we needa return on capital."LIMITINGACCESSInsteadof betting big on new investmentoraggressivelyaisingprices,AT&T is choosingacontroversial hird way: It's trying to limit theiPhone eatures ustomers anuse.The com-pany prohibits Webcastsand file sharing onits unlimited dataplans,activities someothercarriersallow,"We need o be able o manage ur traffrc,"saysStankey. You can't haveeverybodywatching YouTubedur-ing an emergency." he Net Neutrality movement disagreeswith that reasoning. We'reat a critical moment,"saysBenScott,policydirectorof FreePress, nonpartisan roup hatargues elecomprovidersshouldhaveno ability to limit theircustomerstnetwork access.tDowe as a country invest nbandwidth,orthe networktools o imit bandwidth?"AT&T also akesa hard ine on Phone tethering," he pro-cess y which users ook up a computer o a smartphone ogainNet access.Most carriersallowtethering for a small ee.AT&T does, oo, but not for the iPhone; nstead, Phonecus-tomerswho want aptopNet accessmustpayat eastg4o amonth for a separatemobile aptop deviceand data account.Mackay Bell, a 39-year-old freelancewriter in Los Angeles,

says e's"pissedoff" that AT&T won't let him tether."It'sridiculous that I shouldhave o get aUSB oggle andpay somuch extra ' hesays.His blog,at attcritic.blogspot.com, ea-tures he AT&T ogoasDr. Evil rom the AustinPowersmovies.Bellsays ewould ump atthe chancetohave VerizoniPhone.AT&T says t plans o offer Phone ethering,but for now, saysStankey,Youdon't wantto throwmore gasoline nthe fue."The Mackay Bells of the world wouldn't be so worrisomefor AI&T were ts once-mighty andlinebusiness till strong.But Bernsteinestimateshat theunit's profit marginswill fallqzso

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from3zVo oday to z67o n three years,which translates o a$3.6billion plunge n that segment's perating ncome.Likethe rest of the telephone ndustry, AI&T is being hit hard bythe growingshareof households pting for only cellphones. talsohasbeenbuffetedby competition from cablecompanies,which bundlephoneserviceaspart of their phone,Net, andTV packages.Upgradingphone ines to competewith cablecompaniessn't cheap.FiOShasgone rom zerocustomers o3.5million in fiveyears-but to get here,Verizon s investingmore hangz3billion n fiber-opticwires.FRAYINGANDLINEGiven he economicsof landline elecommunications,t'slittle wonderAT&T hasn't madea market-altering nvest-ment in its U-Verseservice.The companyhasn't divulgedhow much it has devoted o date, but says t has nvestedless hanhalf of whatVerizonhasspentpercustomer ome.CreditSights'Zhaoplaces he total U-Verse nvestment nthe vicinity of gto billion. AT&T concedeshat it won't berolling out U-Verseo rooTo f ts homesandwill opt nsteadto resell hird-party satellite elevision n thehomes t isn'trewiring. "Insteadofbundling a goodvalueproposition okeepcustomersaway rom the cable riple play, hey adopthalf-baked olutions/'says hao.BruceKushnick, hairmanof TeleTruth,a consumer-advocacyroup,callsU-Verse acheap opperafterthought"and aultsAI&T for neglectingits stillsubstantialnumber f andline-onlyhouseholds.aysStankey: We'rehaving an awfullot of successor somethingthat's an afterthoughtJ'Not all the feedback asbeenpositive.AdamAlix, zo, s aNortheasternUniversity studentwhoseparents n Connecti-

Rust a studentin Virginia, sessocial networkingto planconsumerprotests

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cut say hey'vehadchronicsoundprob-lems with U-Verseand are consideringswitching o cable. n December, lix fileda complaintontheirbehalfwith Connect-icut'sPublicUtilitiesControlDept.andon]an. 4 senta etter to StateAttorney GeneralRichardBlumen-thal. "What wasmost unsettling to me was hat AI&T neverseemedtoistento what I hadto say,neveracknowledgedthatthe fault lay with them nsteadof with ourhardwareand wir-ing, and hat they wastedsomuch of my time ' saysAlix.Yet AT&T can't afford o redouble ts landlineeffortsnow,because biggerwar s laringup inwireless.ForyearsVerizonhad esisted utting its wirelessprices,but on an. r5 t slashedthe monthly rate on its unlimited callingplan from $99.99to$6S.Sg. T&T quicklymatched he offer or all ts cellphoneproducts,even he iPhone.The upshot?An iPhonecustomerwho had beenpaying9149.99a month for unlimited calling,Web-browsing, nd ext service ow pays ust 9rr9.99. "Weobviously want to remain competitive/' saysAI&T WirelessspokesmanMark iegel.With customers n open revolt, AT&T's definition of"competitive" modestly loweringpricesand aisingnvest-ment spending-might not be enough o staveoff Verizon."I'm not awareof any company n this country that has hadso aloof a stance oward quality of service/' Rich Doherty ofThe EnvisioneeringGroup,a Seaford N.Y.) elecommarketresearchirm, saysof AT&T. "And that's after wo anda halfyearsof fronting the world's most elegantand entertaininghandhelddatadevice."Maybe osingsomecustomerso Verizonwouldn't be heworst thing for AT&T. Its datanetworkcould usea breather.And AT&T wouldn't mind see ingVerizonstrain under theweight of PhoneNation. Soonafter OperationChokeholdhittheblogosphere, erizonsignaledthatit was eadyforApple'sbusiness. ureabout hat? Bw- W th Ar h He seldahlandDianeBradv

fffirxchangeRead, save,and add content onBW's Web z,o tooic networkiNeedYou,AT&TIt wasn't all oohs and aahsduring Pad's ntroductiop. herewere alsogroanswhen news broke hat AT&Twould bethe official erviceprovider or Apple's much anticipatedtablet computer. But a Jan.27 anicle in PC Magazineargues that Steve Jobs has five good reasons o stick withAT&T.Here'sone: GSM, the technologyused by AT&T sthe most prevalentstandard worldwide and is therefore keyto Apple's nternational xpansion lans.Another:Verizon,which s AT&T'smain ival, as been supplementing ts ownlineupof smartphoneswith additions rom Android andPalm.So the carriercould probablydo without he spike ndata traffic that a host of iPad users would bring,To read the PC Magazine story,go to http://bx.business-weekcom/a pple ret erence /

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