Cover Story February 3, 2010, 11:00PM EST

AT&T's iPhone Mess

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In December, Alix filed a complaint against AT&T over problems with its landline network. Brian Smale

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Says Stankey: "We're having an awful lot of success for something that's an afterthought."

Not all the feedback has been positive. Adam Alix, 20, is a Northeastern University student whose parents in Connecticut say they've had chronic sound problems with U-Verse and are considering switching to cable. In December, Alix filed a complaint on their behalf with Connecticut's Public Utilities Control Dept. and on Jan. 4 sent a letter to State Attorney General Richard Blumenthal. "What was most unsettling to me was that AT&T never seemed to listen to what I had to say, never acknowledged that the fault lay with them instead of with our hardware and wiring, and that they wasted so much of my time," says Alix.

Yet AT&T can't afford to redouble its landline efforts now, because a bigger war is flaring up in wireless. For years Verizon had resisted cutting its wireless prices, but on Jan. 15 it slashed the monthly rate on its unlimited calling plan from $99.99 to $69.99. AT&T quickly matched the offer for all its cell-phone products, even the iPhone. The upshot? An iPhone customer who had been paying $149.99 a month for unlimited calling, Web-browsing, and text service now pays just $119.99. "We obviously want to remain competitive," says AT&T Wireless spokesman Mark Siegel.

With customers in open revolt, AT&T's definition of "competitive"—modestly lowering prices and raising investment spending—might not be enough to stave off Verizon. "I'm not aware of any company in this country that has had so aloof a stance toward quality of service," Rich Doherty of The Envisioneering Group, a Seaford (N.Y.) telecom market research firm, says of AT&T. "And that's after two and a half years of fronting the world's most elegant and entertaining handheld data device."

Maybe losing some customers to Verizon wouldn't be the worst thing for AT&T. Its data network could use a breather. And AT&T wouldn't mind seeing Verizon strain under the weight of iPhone Nation. Soon after Operation Chokehold hit the blogosphere, Verizon signaled that it was ready for Apple's business. Sure about that?

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iNeed You, AT&T

It wasn't all oohs and aahs during iPad's introduction. There were also groans when news broke that AT&T (T) would be the official service provider for Apple (AAPL)'s much anticipated tablet computer. But a Jan. 27 article in PC Magazine argues that Steve Jobs has five good reasons to stick with AT&T. Here's one: GSM, the technology used by AT&T, is the most prevalent standard worldwide and is therefore key to Apple's international expansion plans. Another: Verizon (VZ), which is AT&T's main rival, has been supplementing its own lineup of smartphones with additions from Android and Palm (PALM). So the carrier could probably do without the spike in data traffic that a host of iPad users would bring.

To read the PC Magazine story, go to http://bx.businessweek.com/apple/reference/ .

With Arik Hesseldahl and Diane Brady. Bloomberg BusinessWeek Senior Writer Farzad covers Wall Street and international finance.