AT&T Possible Price Moves May Backfire

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Developers may need to slash prices on games, e-books, and other tools sold in online bazaars such as the Apple App Store, says Richard Murphy, an analyst at IDC. App developers may also need to change how they make money, relying more on advertising rather than one-time fees or subscriptions over time.

A wide range of service providers would be affected. "Mobile is absolutely central [to our growth]," says Tim Westergren, founder of Internet radio service Pandora, which sells applications that put its streaming stations onto the iPhone, Research In Motion's (RIMM) BlackBerry, and other smartphones. "It accounts for half of our new listeners and a third of our listening hours. Clearly, the more expensive the [mobile] bandwidth, the worse it is for us."

Network Challenge

In the U.S., AT&T is the exclusive carrier of the Apple iPhone. About 3% of AT&T's iPhone users generate 40% of all the traffic over AT&T Mobility's network, the company contends. Heavy demand by a small proportion of the user base erodes margins, says Craig Moffett, an analyst at Sanford C. Bernstein (AB).

AT&T supporters contend that unless it changes the way it charges some users for data, customers across the board will end up with worse service. "The alternative is having the network collapse," says Michael Mace, a principal at Rubicon Consulting. AT&T says it is trying to upgrade its network to make it more capable of handling heavy traffic.

But critics say the company shouldn't penalize customers for what they say is AT&T's failure to anticipate surging demand for smartphone data. "AT&T's wireless profits are sky-high, but it still wants an excuse to charge consumers more and continue to advertise a network experience it can't deliver," says Aaron at Free Press. In December, Consumer Reports reported that AT&T came in last in consumer satisfaction in more than a dozen large cities. The report noted: "If you're readying to buy Apple's phone, prepare for possible disappointment with its service."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

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