Why is the iPhone Still Tethered to AT&T?

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Apple and Steve Jobs

AT&T Chairman and CEO Randall Stephenson holds an iPhone while speaking at NXTcomm last year.
Source: AT&T

Breaking up is hard to do. But for AT&T and Apple, parting ways may be a prospect daunting enough to keep them together.

That may be the cold reality behind negotiations with Apple (NASDAQ: AAPL) over the future of AT&T’s (NYSE: T) position as the exclusive U.S. carrier for the iPhone. According to a report in the The Wall Street Journal, the carrier is aiming to lock up exclusive rights to the iconic smartphone through 2011.

But ultimately, neither party has many alternatives, industry observer say.

The two companies have worked together since the first iPhone debuted in 2007, and their agreement had been set to expire in 2008. In August, the two firms agreed to extend the exclusivity deal to the end of this year.

Any further extension on AT&T’s exclusive with Apple for the iPhone hinges on a variety of factors. But one analyst says it may come down to the type of networks each carrier uses.

“Where else would Apple go? I don’t think they’d go to Sprint or Verizon, because they’re CDMA versus GSM, which is what AT&T uses,” IDC analyst William Stofega, program manager for mobile device technology and trends, told InternetNews.com. “The obstacles to switching aren’t insurmountable, but it takes time, it’s a difficult proposition to just switch in a snap.”

“On the other hand, Apple can say, “If we don’t get what we want, we’ll walk away,’ and that’s never good,” he added.

Spokespeople from AT&T and Apple declined to comment on the Journal report.

Profits from the iPhone

It makes sense that AT&T would want to keep capitalizing on the money-making iPhone — the iPhone 3G launched in July 2008 and has since netted big gains for the carrier.

AT&T’s fourth-quarter iPhone 3G activations totaled 1.9 million — 40 percent of which were new customers, AT&T said — and the company’s total iPhone activations over the last half of 2008 topped 4.3 million. The company also said in its most recent earnings statement that iPhone users are higher-value — delivering 1.6 times the average revenue per user — and less likely to leave than AT&T’s average wireless customer.

And with Apple rumored to be releasing a new iPhone, which could happen as early as June, it makes sense AT&T would want to lock in its contract until 2011.

But while it may appear Apple is holding all the cards, it may not be prudent for them to switch from AT&T to a carrier using a different network technology, Stofega said.

“I don’t think they [Apple] want to go down that rat hole, especially if they have a new phone coming out this summer,” he said.

Meanwhile, reports circulate based on a China Times story that indicated multiple new versions of the iPhone may be forthcoming — all GSM-compatible.

Beyond the network

In addition to the underlying network, Stofega said other factors to consider on AT&T’s part include how big of a draw the secondary iPhone market will be when compared to other new smartphones rolling out this year, especially the Palm Pre expected out by June.

“There is a cost to taking an iconic device and putting it on the market and supporting it,” Stofega said. “AT&T needs to know, ‘What will the next iteration do for me? Do we have pretty much all the people we’re going to get?'”

“Can they deliver on a new device that’s going to increase market share more than the Palm Pre or a new RIM device?” Stofega added. “From my vantage point, there’s a lot of interest in the Pre — people are saying it’s gong to be an iPhone killer. If Palm gets it right, they may have a serious answer to the iPhone moving forward.”

Article courtesy of InternetNews.com.