There have been lots of articles recently about the iPhone and AT&T – each tackling an individual aspect of the relationship between the carrier and the hardware vendor. But I wanted to take a step back and look at the AT&T/Apple relationship as a whole, and answer a fundamental question: overall, has the iPhone been good or bad for AT&T?

(Warning – this is going to be a long post – skip to the bottom if you just want to read the conclusions!)

Note: I wrote this post on the evening of 22 July, whereas AT&T’s Q2 numbers were released the morning of the 23rd. A quick look through the Q2 numbers reinforces several of the points made here and doesn’t appear to contradict anything significantly. It appears the iPhone dragged down AT&T’s OIBDA margin by a couple of points – less than last time around, although that reflects the timing of the two launches in the quarters they impacted most strongly.

First, the good stuff

Let’s start with the positive aspects of the iPhone for AT&T. The obvious thing to look at is the impact on customer additions, and since very few (if any) mobile subscribers will choose an iPhone as their first device, the key metric to look at is customer wins from other carriers. Here’s a Morgan Stanley chart from late 2007 – based on their extensive surveys (all the usual caveats apply, but this is a really decent sample size and illustrates what I believe to be real trends):

(click to see a larger version)

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I came across a blog post the other day that highlighted an interesting activity Verizon is toying with at the moment in the social telco space. It’s somewhat tangential to the core of what being a social telco is about, but it’s an interesting model nonetheless and certainly something worthwhile for other telcos to think about. I hope Verizon will be reasonably open about sharing the results of the experiment and what they learn from it.

I have since found the source press release on Verizon.com and there’s some more detail there. Essentially, Verizon has set up online fora for its customers to go and seek out answers to questions or solutions to problems, and many of the responses will come from other customers rather than Verizon employees. The Verizon Community Forums, as they’re known, cover all of the major consumer services Verizon offers, including mobile services, and the front end is split into various product and service categories so you can quickly browse to the one you need help with. 

The press release reads, in part:

The Verizon Community Forums have become the company’s hottest online venue for consumers to submit questions, share advice, and get answers about Verizon’s robust portfolio of broadband, entertainment and communication services.

On the forums, customers can interact with each other, ask questions, problem solve, and learn more about the company’s products and services. Answers posted on the forums most often come from the community’s highly active members, referred to as “super users,” an important subset of customers critical to the success of any online community.

According to Mark Studness, director of e-commerce at Verizon, the Community Forums have been well-received since rolling out last July, generating more than 10 million page views.

“The Community Forums have spurred interaction among customers because people today expect to be able to find answers to their technical questions online,” said Studness. “The feedback we’ve already received shows that our customers value the personalized peer-to-peer advice and feedback they receive from fellow users.”

The fora aren’t actually all that different from those you find on various other customer support sites, with a good sprinkling of official Verizon personnel keeping an eye on things and picking up on issues that can’t easily be resolved (a set of customers was seeing commercials interrupting and playing over regular programming, for example – something no fellow user can resolve). But ordinary users are providing lots of the answers, including on fairly technical topics.

One of the most interesting aspects – and something which takes this beyond the standard fora and into true web 2.0 territory – is a tool which allows active helpers to accrue “Kudos” by providing helpful answers to others. Part of the site is a “most kudoed users” page which lists the user Justin profiled in the Verizon press release in the number one slot. Kudos (treated on the fora as the plural form of something called a Kudo – a sort of virtual currency) are awarded by members to those who provide particularly insightful answers or solutions. The Kudos have no value beyond the warm and fuzzy feeling and / or sense of satisfaction or pride they engender, but they seem to provide motivation enough, again in true Web 2.0 fashion.

None of this is earth-shattering, and AT&T is doing some similar things with its business customer support, but it is a good example of the kind of thing that’s possible and an encouraging sign that telcos are thinking a bit more imaginatively about some of these issues.

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I got a letter in the mail today from Optimum / Cablevision, our friendly local cableco. We were Cablevision customers when we first moved to the area because Verizon’s FiOS service, which we had known and loved in Boston before we moved, was not available yet. We had broadband and TV from them and phone from Verizon. When FiOS duly arrived in our area, we signed up for the triple play from Verizon and ditched Cablevision without further thought.

Since that time we’ve received the odd piece of mail from Cablevision (”some FiOS customers are not getting what they thought they signed up for”, “wish you hadn’t switched?” etc.) and the other day a Brazilian guy doing door to door sales for the company showed up too.

But the letter that arrived today was a bit different. It appears Cablevision is tired of my refusal to come back to them and has decided to start with the scare tactics instead… I’ve embedded a small version of the letter below but click here for a large image and here for a PDF (both are scans of the original).

My wife brought me the letter in my office and just laughed about it. “Oh no, our house is going to burn down because of our FiOS service!” she said. She saw it for what it was – scare tactics, pure and simple. But would other customers? Would this work? And are they sending this to everyone, or just people like me that have said no too many times to the straight pitch?

Here’s the full text:

Dear Neighbor,

New York Public Safety Commission Inspectors have found that “a high proportion” – over 50% – of Verizon’s FiOS installations in customer homes had failed to adhere to some of the bonding and grounding provisions of the National Electrical Code (NEC); the Commission has ordered Verizon to undertake a comprehensive remedial plan. The NY State Attorney General’s office – supporting the Commission’s action – had also noted that many customers were unaware of the potential risks involved in these faulty installations.

State inspectors first found grounding problems in the spring of 2006. They discovered that some FiOS equipment – Optical Network Terminals, or ONTs – had been grounded to heating fuel-vent pipes and plastic pipe elbows, or were not grounded at all. The PSC report noted that improperly grounded electrical equipment can cause fires or electrocution in the event of equipment failure or lightning strikes. PSC inspectors found similar problems in a series of subsequent audits through the summer of 2008. Although Verizon has now improved its code compliance on new installations, a significant number of faulty installations still remain and, under Verizon’s plan, might not be fixed until May 2009. Verizon customers’ FiOS installations in areas that have yet to be addressed are still at risk for these bonding and grounding faults.

As an alternative, Cablevision offers our popular Optimum Triple Play which includes TV, High Speed Internet and Unlimited Calling in the US, Puerto Rico and Canada [why they think I need to know about Puerto Rico and Canada, or any area outside of the New York area, I have no idea] for just $29.95  a month each for two years with FREE professional installation. And there are no annual contracts.

For more information or to order the Optimum Triple Play, please call 1-866-***-****. Our sales representatives will be happy to help you, 7 days a week, 7am-midnight.

Thank you,

Kathy Filosa
Vice President

Note, no mention of them actually removing Verizon’s ONT, so one assumes this actually does nothing to solve the underlying problem, should there be one in the first place. Since Verizon’s fiber installations are permanent (i.e. no going back to copper) I don’t believe Verizon would ever take it away anyway, so by cancelling I’m probably even less likely to have them come and rectify the issue than if I at least remained a customer…

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I’ve been meaning to do another post on net neutrality based on a fair amount of recent activity on various blogs but haven’t had time. To cut down on the number of open tabs in my browser, I’m just going to dump the links here and let you read them yourselves:

• Vint Cerf for Google on reasonable approaches to managing networks
• A “history lesson” from Verizon
• Joost CEO Mike Volpi on net neutrality and Adam Smith

I’m not convinced any of these companies has 100% the right approach but I’m glad we’re finally discussing it in a reasonable manner rather than simply posturing or suing one another about this…

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I’ve had a variety of experiences with Verizon recently – two this week, in fact – as a consumer, that have reminded me of the importance of consistency.

We are Verizon customers for all our home services – TV, Internet and phone (I use a VoIP service from Vonave for my home office). In Boston, we signed up for FiOS broadband and then TV as soon as those options became available, and the experience was great from start to finish. Our set top box conked out at one point and someone quickly came to replace it. Even my wife loved the service, and she’s inherently skeptical of technology.

So, when we moved to New Jersey, we wanted FiOS again, but it wasn’t available. So we went with the local cable company until FiOS was available a couple of months after we moved in. We ordered it on a Wednesday, it was installed on a Friday evening, and by midnight on Friday both the Internet and telephone services had gone down. Not good news. So I called Verizon and asked them to come and fix it. To cut a long story short, it took four days and four calls to technical support to get someone out to fix it. It was a holiday weekend and the biggest problem was that the Verizon technical support people simply weren’t able to reach anyone in the local offices here in New Jersey to arrange an appointment. They had to keep promising to call me back, which they never did. The whole thing was hugely aggravating and a big contrast from our experience in Boston.

Then, this past weekend, there was a thunderstorm on Saturday evening and at one point we heard and saw a very loud and bright lightning strike very close to the house. It later turned out that it had been close enough to have fried both the guts of our FiOS service and our FiOS set top box, such that all our services were down. It was late by the time we figured this out, but I called Verizon to set up something for Sunday or Monday. At that point I was told the wait to talk to a representative was long, but I used an automated system to record the fact that I was having trouble, and was informed that someone would contact me by noon on Sunday to rectify the situation. I provided my cellphone number and hung up. However, no contact by mid-afternoon on Sunday and so I called again. The same automated system again tried to persuade me that it would provide better service than a human being and came up with the response, “we are committed to fixing your service by Sunday. Is there anything else?” This wasn’t terribly helpful, since I hadn’t told anyone what the problem was, let alone arranged a time and date to have it fixed. So I said yes, there was something else, and got to talk to a person. They arranged for someone to come the next day (Monday) and sure enough someone was here by 10am and fixed everything by noon. Although the IVR system still leaves something to be desired, they got things fixed quickly, the guy who came was efficient and professional, and we were very pleased.

Then, on Tuesday, we were meant to have a new set top box installed. I had found the online ordering system too vague to be sure I would get what I wanted, and so I called to place the order. I told the person I talked to that I had seen online appointments were available on the following Tuesday, and we arranged to have the installation done then. I was given a four-hour window and and order number and hung up. That window came and went yesterday but no-one showed up. So I called, and was first passed around three different people, each of whom merely told me they were putting me on hold (not transferring me) and I had to re-explain my situation every time. Ultimately, I found someone who didn’t transfer me while on hold and she told me first that they had no record of my order at all, and then that the local office had it booked in for a Tuesday two weeks away (apparently, data entry error on the part of the person taking the order). So they apologized and asked me when I would like to reschedule the installation for. I gave them some dates and they said someone would contact me to let me know when it would be. Then, today, a set top box arrived in the mail. No letter, no explanation, just an STB.

What the heck? Why isn’t the service we have sometimes received from Verizon the service we receive all the time? And how hard can it be to get this basic stuff right? If Verizon were consistently as good as they sometimes are, we’d be phenomenally happy. But since they screw up in some way at least once out of every two times I need something from them, we’re decidedly unhappy. Unfortunately the cable company is no better, so we’re somewhat stuck. But there has to be a better way, and I would hope that Verizon, which has lowered its churn to industry-leading levels on the wireless side, can find a way to keep its wireline customers just as happy.

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The standard story told in the US media, by certain politicians and by consumer rights groups is that the US lags the rest of the world in broadband, with studies often placing the US well down the international rankings. This week there was a report from the INSEAD / the World Economic Forum which contradicted somewhat those glum findings and accords more closely with my own views on this topic.

The problem with many of these reports is that they focus on price and availability of high speeds without investigating the negative effects associated with heavy government intervention in the market. As an example, Japan is often cited as the beacon of international broadband, often closely followed by Korea, but in both of these countries the government has intervened in a heavy-handed fashion to achieve the results seen today. European countries often also score highly, often because of the competition introduced via local loop unbundling regulations – a less intrusive form of intervention than in Japan and Korea but nonetheless a much more aggressive form of regulation than that which applies in the US.

Another flaw is that it is assumed that faster speeds are always a good thing, and that diminishing returns never set in. The fact is that, beyond a certain point (currently around 10Mbit/s or so) extra bandwidth is just that – extra. There is almost no application in existence today which requires more than 20Mbit/s when in peak use, and so 100Mbit/s is a senseless benchmark. Getting more of the population to 5, then 10 and ultimately 20Mbit/s is a reasonable goal, but beating up on the US for the paucity of 100Mbit/s connections is an exercise in futility that could lead to bad investment decisions. Verizon’s FiOS infrastructure is certainly capable of delivering that kind of bandwidth, although AT&T’s U-Verse probably isn’t under the present architecture. But the point is that it doesn’t matter.

Another thing that’s rarely examined is the pricing side of the equation. Providers in Korea in particular have a very spotty financial history due to the suicidal price wars they’ve engaged in. But that competition has been spurred by the fact that they – like the US – have inter-modal competition between various infrastructures, not just regulation-based service-level competition on a common infrastructure. The latter gets quick results in terms of number of providers and price competition but it rarely foments real innovation because the underlying wholesale services everyone is using are the same. With a shift from bitstream to local loop unbundling products that changes somewhat, but competing infrastructures – especially ones built on fiber – are much more likely to provide real differentiation.

Hence the massive speed and price competition that’s been triggered in the US in areas where fiber has been rolled out by either AT&T or Verizon. In time this will reach more and more of the population and provide a further boost to both the speed and price sides of the equation.

The biggest issue for me is that these reports rely a lot on the question of timing. Where the US is today, other countries either were yesterday or will be tomorrow. We’re all heading down pretty much the same path, just at different speeds. The impatience that often accompanies the criticisms of US broadband deployments is misguided too. It usually leans on an argument about competitiveness and the ways in which broadband can transform the way we work by providing more opportunities for home working / teleworking and so on. But guess what? The measly 5Mbit/s so derided in these studies is just fine for most homeworkers and is available to almost everyone. The biggest barrier to adoption of home working is the cultural change involved, not the technology. Many companies and individual managers are still uncomfortable with the idea and suspect that a home worker is a less productive worker. That attitude needs to change more than we need more government intervention or sackcloth and ashes about the parlous state of the US broadband market, and it’s great that we finally have a study that seems to get that.

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Rick Whitt of Google has come clean about its strategy in the 700MHz auction and confirmed what many suspected – that Google deliberately bid up the price of the C Block, even upping its own bid in the absence of a higher competing bid several times, in order to trigger the open access provisions.

Given that it must have been fairly clear early on that Verizon Wireless was the other bidder, and it’s already initiated its open access program, what did Google really gain by doing this, other than using its own cash to force Verizon to part with more of its money? One of three scenarios must hold true:

1. Google wasn’t sure Verizon was the other bidder and wanted to make sure any other bidder (AT&T) would be subject to open access too
2. Google merely wanted to force Verizon to pay more for the spectrum because there weren’t any other serious bidders for it
3. Google believes that the open access provisions attached to the C Block will require more of Verizon than it has already announced it will provide.

The most likely scenario is 3. But isn’t Google mistaken here? Is it assuming that the FCC’s open access rules go further than what Verizon Wireless had already agreed to do? The FCC’s rules (see page 89) are unfortunately vague, and it may be counting on a more favorable interpretation of them than Verizon is. But there are one or two areas where Verizon has not yet agreed to go as far as it will now be required to:

Scope of the requirement for open platforms for devices and applications. Wireless service providers subject to this requirement will not be allowed to disable features or functionality in handsets where such action is not related to reasonable network management and protection, or compliance with applicable regulatory requirements. For example, providers may not “lock” handsets to prevent their transfer from one system to another. We also prohibit standards that block Wi-Fi access, MP3 playback ringtone capability, or other services that compete with wireless service providers’ own offerings. Standards for third-party applications or devices that are more stringent than those used by the provider itself would likewise be prohibited. In addition, C Block licensees cannot exclude applications or devices solely on the basis that such applications or devices would unreasonably increase bandwidth demands. We anticipate that demand can be adequately managed through feasible facility improvements or technology-neutral capacity pricing that does not discriminate against subscribers using third-party devices or applications. In that regard, we emphasize that C Block licensees may not impose any additional discriminatory charges (one-time or recurring) or conditions on customers who seek to use devices or applications outside of those provided by the licensee. Finally, C Block licensees may not deny access to a customer’s device solely because that device makes use of other wireless spectrum bands, such as cellular or PCS spectrum. However, we also note that, in accepting a multi-band device for use on its network, a C Block licensee is not required to extend the requirement for open platforms for devices and applications to other spectrum bands on which the provider operates.

However, the FCC goes on to limit the scope of these rules:

We emphasize that we are not requiring wireless service providers to allow the unrestricted use of any devices or applications on their networks. In particular, we are mindful of the risks network operators face in protecting against harmful devices and malicious software. Wireless service providers may continue to use their own certification standards and processes to approve use of devices and applications on their networks so long as those standards are confined to reasonable network management. For example, providers are free to choose their air interface technology, and to deny service to devices or applications that cannot operate on the same technology, since such a restriction permits significant network efficiencies without significantly reducing consumer access to services and features. We also recognize that wireless providers have legitimate technical reasons to restrict particular non-carrier devices and applications on their networks, specifically to ensure the safety and integrity of their networks. In particular, we believe that it is reasonable for wireless service providers to maintain network control features that permit dynamic management of network operations, including the management of devices operating on the network, and to restrict use of the network to devices compatible with these network control features. Standards to ensure that network performance will not be significantly degraded would also be appropriate.

If I were Verizon, I would be pretty annoyed with Google at this point, whatever its rationale. It artificially bid up the price of the spectrum, triggering both a higher price paid by Verizon and the open access requirements, even though it apparently never had any plans to own the spectrum. I’m not sure it would have any legal grounds for taking action on this, but it certainly appears that Google abused the system for its own advantage and to Verizon’s disadvantage.

At any rate, Verizon is pressing ahead with its plans to use the 700MHz spectrum for its LTE network, as is AT&T with its 700MHz spectrum, and so far it isn’t complaining too hard about those open access rules. Since it has done an about face on the question of “openness” perhaps it is willing to embrace these additional conditions too. But I would guess that it will fight for the loosest possible interpretation of the remaining conditions when the time comes, while Google will probably put some high-paid lawyers on the other side.

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