An AT&T Mystery: Abrupt New York iPhone Shutdown

(page 2 of 2)

In the past, people have bought large numbers of iPhones for resale in other countries where the device wasn't yet available. Now that it's retailing in 90 countries, demand for unofficial iPhones has diminished.

One explanation might be that a sudden surge in orders for iPhones to be delivered to a small number of addresses in the New York area triggered AT&T's response out of concern that those phones might then be unlocked and shipped overseas to a country where the iPhone isn't yet offered. In that scenario, AT&T would be losing out on subscription revenue for phones it is selling at a subsidized price ranging from $199 to $299. The move may have been meant as a temporary measure.

Another potential explanation: some type of credit card fraud. According to payment processing firm CyberSource (CYBS), more than 1% of orders placed with merchants in the U.S. and Canada in 2008 later turned out to be fraudulent, and the rate of fraudulent orders was double that for consumer electronics products.

a security blanket on credit fraud?

The survey also found that in 2008 merchants rejected nearly 3% of orders because they suspected payment fraud, down from a rate of nearly 5% in 2007.

A large block of iPhones may have been ordered with fake credit-card numbers for delivery to addresses in New York. Rather than implement new measures to screen out the orders from legitimate ones, AT&T may have chosen briefly to shut off sales to all customers in the New York area until a proper fix could be put in place.

The decision to cease sales temporarily did little to dampen demand for Apple stock, whose shares rose to a record on Dec. 28, gaining $2.57, or 1.2%, to 211.61. Apple shares have more than doubled this year. By comparison, the information-technology index of the Standard & Poor's index of 500 stocks has risen 61% in 2009.

It's unlikely that the decision to cease sales was caused by a sudden spike in sales of the iPhone. Analysts have estimated that iPhone unit sales were above 11 million during the holiday quarter; sales through AT&T's Web site likely account for a small percentage of the total sold in North America. Even if the problem were caused by a sudden onslaught of iPhone buyers, customers in New York could likely be sent phones from other locations, says Tuong Nguyen, analyst with Gartner (IT). "If they were out of iPhones in the location that serves New York, AT&T could simply route a phone to the customer from somewhere else," he says.

Whatever the cause, the incident did AT&T no favors from a public relations perspective. Says Envisioneering's Doherty: "The people at Verizon are probably popping open leftover Christmas champagne over this."

Hesseldahl is a reporter for BusinessWeek.com.

Business Exchange

Track and share business topics across the Web.