AT&T, I’d rather be tied with a tether than a leash!

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The new iPhone 3GS was announced today, and many of it’s new features were confirmed by Apple.  And AT&T won’t be supporting some of these new features, I’d like to explain what, why, and what we as consumers can do to prevent it. One of these great new features is tethering, and will be offered in many countries by a variety of carriers, but… AT&T wasn’t even stated as being one of the companies PLANNING a launch.  WHY?  Your network supports it, the phone now supports it… Another one of these great new features was MMS, and while it is being offered on “Twenty-nine carriers in 76 countries” guess which country isn’t going to be one of them? AT&T is the only carrier of the iPhone in the US, and despite offering it for many of their other video/photo capable phones, iPhones have been left out and forced to use a very awkward and painful system to view their MMS’s (Open SMS, copy down long random user name and long random password, and then, because the link isn’t even often properly clickable, copy down the link, manually enter link into iPhone or computer browser, and at the corresponding web page manually enter both the long user name and the long password.  If there were no typo’s in this process you’ll get a crappy miniturized version of the original content sent to you).  Can’t blame Apple, the phone demonstrated it was quite capable of displaying photos and videos, even with the old model.  And now that sending MMS is integrated into the new operating system, there remains no excuse whatsoever.  But AT&T is in no hurry, stating no support until late summer because… drumroll: They have to remove the Opt-Out codes for all the iPhones in the system. So they have a little toggling to do in their database.  Should this process take 2-4 months?  No.  But it will.  Because there is no market pressure for them to do so.  AT&T set it up that way.

Contracts

What about all the screaming customers?  Don’t they represent market pressure?  Not really.  First lets look at the group, currently the only AT&T customers who are holding phones that can support MMS, and will support tethering who won’t be able to use these features are iPhone users.  Blackberry users on AT&T are currently enjoying BOTH of these features.  So the only customers screaming are iPhone users.  And AT&T has us 2 ways:

  1. Contract – Most iPhone users are in a 2 year contract, that isn’t up and won’t be up for a while, additionally new hardware purchases, lost broken phones (no insurance offered), price plan changes, etc. all extend your contract.  It’s a zero sum game.
  2. Hardware – for those of us who dutifully make sure not to change our price plan, own the oldest iPhone hardware, and refuse cheaper upgrade plans, the contract can’t hold us.  But AT&T’s current exclusivity agreement for the iPhone can.  Sure you can hack your phone, and put it on T-mobile, but you won’t find MMS or tethering there because they can’t officially support it until the agreement runs out.  You’ve made a large investment in the cost of your phone, in money, applications, learning curve, etc, and this inertia is enough to keep most customers with AT&T.  Until the features and screaming make it so we’re better off going through the hastle of switching carriers, buying another phone and learning it.  They’ve got us.

Monopoly Power

A quick economics lesson: So, AT&T has a large group of customers (iPhone users) who have a large barrier to exit (the requirements for excercising monopoly power) as well as lack of available substitutes (for many of us iPhone users, there is no substitute).  These ingredients allow for the excersing of monopoly power.  What does this mean exactly?  In a perfectly competitive economy every business is forced to take the price of the market and keep their features comparible in order to be competitive.  This price is where the marginal cost (the cost of producing one more unit of product) is equivalent to the marginal profit for selling that unit (What the consumers are willing to pay), this ratio provides no excess profit to the corporation, and leaves all that extra value with the consumer.  Maybe you were willing to pay more, but because of competition you didn’t have to. Monopoly power (whether a true monopoly or a partial monopoly) allows companies to move closer to their ideal selling location, the point at which marginal profit (The profit made for selling an additional unit) is greatest.  They may sell less units, but at a higher price and a more economic cost / revenue ratio.  The consumers end up paying much more, and they lose the advantage they have in a competitive environment.  At the moment, while AT&T would gain customers and remain profitable if they had more reasonable price plans (like not charging extra for SMS, or better data prices) they have no incentive to (from a purely profit standpoint) as they can make MORE money by charging their existing customers more. The same holds true for features.  New features, like MMS / Tethering cost money to implement, and while doing so might bring them more customers (and likely they would still remain profitable), their number crunchers have clearly decided that the costs won’t outweight the profits. Basically, there is a slider, you can choose straight profit $$$ or you can give some of your profit back to the customer in exchange for loyalty and market share.

Comparative Profit Margins
Comparative Profit Margins

Here is a list of the major wireless companies and their operating margins.  In a particular market the players with a higher percentage here are either operating much more efficiently then their competitors, or are taking more customer surplus (good will).  Looking at these figures you might guess that AT&T has the largest subscriber base, when actually Verizon does.  Verizon also happens to rank up near the top in customer satisfaction among us carriers.  T-Mobile, which also has a really high profit margin is the other company that ranks up with Verizon on customer satisfaction, but their relative user base is also much smaller then AT&T. So AT&T charges more money, serves less customers, or has a lower customer satisfaction rating then it’s competitors.  It’s their business model.  And it’s raking in some great profits.  But it doesn’t have to be that way.

Alternative

It’s probably too late to save the iPhone exclusivity, Apple does not have a history of tolerating poor service from it’s partners, and based on the zingers during todays Keynote, they won’t be likely to re-up the exclusive contract.  But AT&T can still bring it back.  By providing a more customer friendly model, the services that the customers (and partners) are demanding, and they’ll keep most of us, but commitment needs to be shown.  Not just a rollout at the expected late date, but an immediate, public and effective effort (even if costly) to surprise us all with a simultaneous feature release date.  The positive press, customer loyalty returned, and in the long term, profits will outweigh any other business plan.

Action

Please tell AT&T that when the option comes to leave, you’ll be walking.  But also, let them know that if they commit themselves to improving the customer experience that you will stay.  By doing so we may affect change.

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