Can AT&T Meet iPhone Network Demands?

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Apple spokeswoman Natalie Kerris says the company is pleased with the progress made by AT&T. Still, an executive familiar with the partnership says the companies have at times locked horns over AT&T's inability to handle network demands. The executive says some Apple staffers fumed last year when AT&T told them of its plans to hype cell tower upgrades without investing in backhaul capacity. The concern was that AT&T's improvements might make it appear people were getting a strong signal on the phone, though the lack of backhaul pipes might still interfere with their phone calls or Web surfing. Apple was "dumbstruck," the person says. "For 50% of the iPhone customers, there would be no benefit."

limits to how fast AT&T can move

Also vexing to Apple was AT&T's inability to support Multimedia Messaging Service, a technology offered by other carriers that lets consumers easily attach photos and video to brief messages, say two people familiar with the matter. Apple—which famously refuses to share product plans even with close partners—told AT&T over a year ago that it hoped to offer MMS in mid-2009, one person says. "Apple felt like they'd given AT&T huge amounts of warning and unprecedented insight into its product roadmap, only to find that AT&T couldn't react," the person says. Donovan says he recalls no friction over the matter, and reconfirms that AT&T hopes to add MMS support by "late summer."

To be sure, Apple has contributed to coverage problems as well. The original iPhone shipped with glitches in its communications software that led to dropped calls. And while AT&T typically likes to hand out thousands of units of new phones so they can be tested as broadly as possible, two sources say Apple gave the carriers only a few hundred.

At this point, both companies say they are making fast progress. Donovan says an internal metric of customer satisfaction has risen 30% over the past four months. The company declined to divulge exact data.

But the challenge is only getting bigger—and quickly. Not only are iPhone sales still red-hot, but customers are downloading more of the 65,000 programs available on Apple's online App Store. That gives them one-click access to an array of wireless services unimagined when the store opened a year ago. Donovan says it's not uncommon for iPhone owners to check a stock 40 times a day. "Anytime a Do Not Walk sign flashes in Manhattan, people pop on their iPhones for that 30 seconds," he says. Many of these services involve video, which chews up vastly more bandwidth than making a simple call or sending a text message.

And there are limits to how fast AT&T can move. While it may take only a few weeks to deploy new-fangled wireless gear in a city's cell towers, techies could spend months tilting antennas at the proper angle to make sure every square foot is covered. It can take two years to get approval for new towers, or to dig fiber-optic cable ditches.

Economics is another problem. Investing in a top-notch network may be critical to keep iPhone owners happy, but it does nothing for Ma Bell's cash flow. Not only could it cost billions of dollars, but it may not bring in much additional revenue. Under the arrangement with Apple, AT&T gets only a flat monthly rate per line for unlimited data usage, normally $30. Extra revenues to use all those App Store apps are shared by Apple and the developer; AT&T doesn't see a penny. "AT&T has a very tough decision to make: How many customers are they willing to piss off?" says Michael Howard, principal analyst with market research firm Infonetics. And, when Apple's exclusive ends, "how many will leave for other carriers?"

Burrows is a senior writer for BusinessWeek, based in Silicon Valley.

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