Apple-AT&T: Hints of Strain

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It's not easy being a partner with the exacting Apple. Remember the Apple event in September 2005, when Motorola (MOT) released its first Rokr phone supporting iTunes? The device was expected to be the headline product of the day. Then Apple CEO Steve Jobs reached into the coin pocket of his jeans and removed the first iPod Nano, which easily overshadowed the phone. The Rokr became a footnote, while the Nano went on to become the most popular iPod model.

iPhone: Two-Thirds of Mobile Web Browsing

In the case of AT&T and Apple, both sides clearly benefit from the pairing. In AT&T, Apple has the largest wireless service provider and one of the most recognized brands in the U.S. Verizon Wireless initially turned up its nose at partnering with Apple on the iPhone. AT&T has plenty to be happy about, too. During its Apr. 22 earnings conference call with analysts, AT&T Chief Financial Officer Rick Lindner noted the "attractive" average revenue per iPhone user and said that since July 2008 the company has seen some 6 million iPhone activations, 40% of which were new to AT&T.

And while it's true that AT&T's margins get squeezed as it spends money to attract customers and then subsidizes the phone on top of that, iPhone customers pay off in the end. Wireless data service revenue was up 26.3% in the first quarter, while voice revenue was down a little over 7%. You know who's using much of that data? Owners of iPhones. As Apple's Schiller pointed out in his remarks, of all the Web browsing done on a mobile device, about two-thirds of it is done on an iPhone. On Yahoo!'s (YHOO) Flickr photo-sharing site, the number of users who upload pictures from their iPhones is more than three times that of those using a Nokia (NOK) N95.

With all that data usage, it should be pretty clear that AT&T needs to bulk up its network. That would have two important consequences: One, it would benefit all the other data customers on the network—those carrying BlackBerrys, Nokia phones, and other handsets.

At the same time, AT&T would have happier iPhone customers—who might temper their calls for Apple to switch the iPhone to Verizon Wireless. Of course, that switch could still happen, since Apple always likes to keep its options open. As we reported in April, Apple and Verizon have had conversations.

With Verizon starting to build out its next-generation LTE network, it could become a serious contender as an iPhone vendor within a year. Apple may not have intended to make fun of AT&T this week, but the message from the audience in San Francisco should be clear: AT&T needs to give iPhone users one less reason to scoff at it.

Hesseldahl is a reporter for BusinessWeek.com.

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