AT&T'S

IM ESS
By Roben Farzad
l l l u s t r a t i o nb y M a t t M a h u r i n

The iPhonehas
swampedits
data network Inmid-December,FakeSteve
Iobs,the alter egoof widely
and sparked read journalist and blogger
Dan Lyons,postedthe fol-
a consumer Iowing appealto his fellow
:::. rebellion.
What membersof iPhoneNation:
r-:!l

"On Friday,Dec.r8, at noon

can Ma Belldo? Pacifictime, we will attempt
to overwhelmthe AT&T data
network and brins it to its knees.The goal is to haveevery
iPhoneuser(or asmany aswe can)turn on a data-intensive
app andrun that app for one solidhour. Sendthe message to
AT&T that we aresick of their substandardnetwork. ... |oin us
andspeaktruthtopower!" Soonthousands of hooligans-orif
you prefer,frustratedcustomerspayingAI&T asmuch asgr5o
per month-took to Twitter andFacebook to join up.
OperationChokeholdmight havebeen a landmark con-
sumeruprising had the federalgovernmentnot steppedin.
Two daysbeforethe plannedprotest,famieBarnett,the Fed-
eralCommunicationsCommission'schief of public safetyand
homelandsecurity,issueda statementwarningthat to "pur-
poselytry to disrupt or negativelyimpact a network with ill-
intent is irresponsibleandpresentsa signiflcantpublic safety
concern."Doing so could interferewith 9tr calls.Fearinga
boomerangofnegativepublicity,the Chokeholders calledoff
the stunt,butthepopularbacklashagainstAT&Tragedon. On
the Dec.zobroadcastof NBC'sSaturdayNighf,Liue,Weekend
UpdateanchorSethMeyersnotedthat Google'snew phone
might poseathreattoApple'siPhoneandadded:"Alsoa chal-
Iengeto the iPhone:makingphonecalls."
AI&T hasstumbledinto a quagmire.When it securedex-
clusiverights to supportApple'siPhoneon its wirelessnet-
work in |unezo07,investorshailedthedealasa masterstroke.
Herewasstodgy,safeAT&T positioningitself to gulp proflts

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 TRUTH
THE
BANDWIDTH
ABtlUT
Wirelessoperatorsare
strugglingto keep up with
demandas more people
use their phonesto check
Facebookand watch videos
online.Here are estimates
of how much bandwidthis
used per personfor various
activitieson differentphones.
One megabyteis roughly Phonessuchas the Motorola Smartohones suchas Advancedsmartphones,
equivalentto one digital Razrareusedprimarily to Research In Motion'spopular includingApple'siPhoneand
book,45 secondsof music, makecalls,andtheyconsume BlackBerryareusedfor phone Motorola'sDroid,makeit easy
or 20 secondsof medium- littlebandwidthevenfor Web calls,e-mail,and lightWeb for peopleto surfthe Web and
qualityvideo. activitiesbecausetheyhave browsing. watchonlinevideos,leadingto
stripped-downWeb browsers. muchhigherbandwidth use.

VoiceGalls:4 MB oer hour VoiceCalls:4 MB perhour VoiceCalls:4 MB per hour Web E

50to(
WebBrowsing:4to 5 MB WebBrowsing:4to 5 MB Web Browsing:40 MB
l0tlMB Net Ri
Net Radio:60MB
YouTu
YouTubeVideos:200 MB 300to
185MB
560MB
800tl
stimated Data: Chetan Sharma Consulting

from a cutting-edge technology.But AT&T and Apple vastly subscriberbaseas well as Net Neutrality types who seekto ist
underestimatedthe iPhone'sappeal.At launch, RealSteve preventtelecomcompaniesfrom dictating customers'op- sig
tions. It could permanentlyhalt iPhonesalesin overcrowded wi
|obssaidhe'dbehappyif the devicecould grabr7oof the global
cell-phonemarket,or aboutro millionunitsfor zoo8.Instead, markets,but that wouldbring more mockery,not to mention Or
Applehassoldatleast4z.4million-z5.tmillioninzoo9 alone, placeAI&T in the unusualposition of denyingconsumersac- so
r4Eoof the global smartphonemarket. AT&T, which markets cessto a productit doesn'tevenmake,
the iPhoneinthe U.S.,simplycan'thandlethetraffic. To keep its uneasyequilibrium, AT&T is trying a little of MI
Making mattersworseis the proliferationof "apps,"those everything:It's marginallyincreasingcapacitywhile trying To
bandwidth-sucking programsthat make smartphonesso to squeezenetwork hogsand subtly reshapethe definition of nu
much smarter(table).AccordingtoApple,iPhoneusershave Net Neutrality. tur
downloadedat leastt4o,ooo differentappsa total of 3 billion so
times. Watchingbroadcastsof Major LeagueBaseballgames BtowrNG KrssEs Be
andstudyingtheglobevia GoogleEarthonapalm-sizedevice So far the gambit has paid off. On fan. 28, AT&T said its cr(
feelslike a promisefrom the future, but the networksdeliver- fourth-quarter profit had risen z6Vofrom zoo8 and that it cel
ing all this dataarestill just catchingup withthe present."We had added7.1million wirelesscustomersin zoo9, equaling un
expectedthis wasgoingto openup a new levelof engagement, its most everin a singleyear.What's more,Applehasn't lost to
and we knew we'd be successfulin the market,"saysAT&T faith; when it unveiled its iPadtablet PC in fanuary,it said it erE
OperationsPresident]ohn Stankey."We missedon our usage had given AT&T the exclusiveright to provide data service' for
estimates." Casein point: It's not atypical,he says,for 8olo of But this time Applehasstipulatedthat AT&T can't lock cus- of
a collegefootball crowd to be usingtheir iPhones. tomersinto servicecontractsfor the iPad,making it easierfor .o.
Theriseof iPhoneNation-withits media-sawy anddata- them to bail if another carrier starts offering service. L

greedycitizenry-has Ieft AT&T with a tough set of options. That'swhererivalVerizoncomesin. The NewYork-based
d
ne
It could significantly upgrade its network to handle all the carrierhasbeenblowing kissesto iPhoneusersfor months, F
In
E

signalingthat it's readyto servethem assoonasApple wants toI

f
new demand,but that would cripple profits. It could charge o
O
more for network accessor limit what customerscan do on to make a deal.Verizonis alreadyracing aheadof AT&T in o wt
f in<
their phones,but that would enragethe all-you-can-eat upgrading its slow copper wires to fast fiber-optic lines

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 INDEPTH

kee Group,haveplacedAT&T last in customersatisfaction

that carry FiOS,its bundle
of telephone,Internet, and
amongmajor carriers.
televisionservices.By con-When AT&T suggestedin Decemberthat somecustom-
trast,AT&T'scompetingU-erswereusing too much bandwidth, it failed to anticipatethe
Verse service, which runs
backlashthat would follow. Businessschoolsarelittered with
over a patchwork of fiber-
casestudiesof companiesthat havepaidthe price for insen-
sitivity to customers'*ishes. (New Coke,anyone?)The perils
optic and copperwires,has
gained little traction. The
haveonly increasedin an erawhen it's easytomakecomplaints
iPhone was supposed to heardglobally.Apple,for one,hadto dealwithits owncustom-
be the great equalizer for
er-servicecrisisin zoo3whenbrothersCaseyandVanNeistat
AT&T, but since the launch
of New York discoveredthat their iPod batterieswere irre-
placeableand lastedjust t8 months. They made a film called
inzooT, AT&T's stock has
Devices such as Apple's newly underperformed tPod'sDirty Secreland launcheda protest Web site that drew
Verizon's
nd unveilediPad are likelyto send millions of hits, afterwhichApple addressedtheproblem.And
by rz percentagepoints and
asy data use even higher.The the Standard& Poor's5oo-
following the successof Super SizeMe, in which documentar-
and iPad will chew up even more stockindexby six. ian Morgan Spurlock chronicled his decline in health while
gro bandwidththan the iPhone For AT&T CEO Randall eatingmealsonly at McDonald'sfor 3o days,the fast-food
because of its larger screen. Stephenson,managingone chain did awaywith its SuperSizemealoption. Companies
divisionfor growth and an-
from PepsiCoto Facebookhavealsodiscoveredthe powerof
rOUf Web Browsing: consumersin changingeverything from products to privacy
other for costsis "a delicate
50 to 60 MB perhour policies.A zoog studybyKeller FayGroupinNew Brunswick,
and very tricky balance/'
N e tR a d i o : 6 0M B saysZhiping Zhao, a tele-
N, |., found th al only zz7oof.conversationsabout a brandrefer
com specialist with Newto the company'sadvertising,Sayscustomerserviceconsul-
YouTubeVideos: York-basedresearchfirm tant feanneBliss:"The marketing messageis no longerunder
AB 300 to 400 MB CreditSights."And if AT&T
a company'scontrol, We trust other customersfirst."
doesn'tfind that balance,it
The most vulnerabletargetsare often companiessuch as
doesn't growJ'Adds Gerard
AT&T that havean ongoingrelationshipwith their custom-
ers.Lockedin by long-term servicecontractsandpowerless
Hallaren, director of re-
searchat TownHall Invest-
overeverythingfrom network failuresto wait times for reach-
800to1,000
MB ment Researchin Littleton,
ing a human being in customercare,subscribersare easily
Colo.:"It's a jugglingact."
frustrated. "The telecomindustry hasbeen a laggardrela-
AT&T saysthe usageissue
tive to other industrieson the customer-servicefront," says
is broaderthan onecompany,"I don't think there'sbeenany MacklinMartin, directorof consultingat InternationalCus-
significant shift in consumertechnologythat hasn't come tomer ManagementInstitute in ColoradoSprings.He points
with growing pains," saysStankey."Think back to America to the high costsof maintainingthe network and customer
Onlineandbusysignals.It's not that theseproblemscan't be support,combinedwith intensecompetition,asfactors."It's
solved-it's that mobile is a different game." a diffrcultbusinessmodelto maintain,"Martin says.
Amongthe angriestcustomersis fohn Rust,a freshmanat
MA BELLIS BACK PatrickHenry College,a Christianschoolin Purcellville,Va.
Today'sAT&T, with nearly joo,ooo employeesand an- Rustis oneof the ThreeMusketeers,a splintergroupformed
nual salesof gtz4 billion, is in somerespectsa remarkable from the Operation Chokeholdcampaignfor the purpose
turnaround story.After the historic dis-
solutionof Ma Bellin r984, Southwestern
Bell (SBC),one ofthe sevenregionalBells
..IDON'T
THINK
YtlUCAN
HAVE
ANUNTIMITED
MtlDEL
createdafterthe breakup,spenta quarter
century reassemblingbroken-off pieces Ft|REVER,''
SAYS AT&T'S "MtlREPEtlPTE
STANKEY. GET
underthe stewardshipof deal-happyCEO
EdWhitacre(nowchief executiveof Gen- DRUNK
ATANtlPENBAR
THAN
ACASH BAR.''
eral Motors).By zoo6, havingrolled up
four of the oriEinalBellsand the remains
of AT&T proper,SBCrechristeneditself AT&T and returned of pesteringAT&T. Outside class,the soft-spoken,polite
to usingthe iconic stocksymbolT (for telephone). 19-year-old-he closeshis e-mailswith "Blessings"-works
Ma Bell was back. Then camethe iPhoneand its arrayof as a video editor and Webdesignerfor a localfllm company.
network-sappingapps.Wirelessprofitssoared,but at a cost. After purchasinganiPhonein Septemberzoo8, Rustsays,he
In DecemberAT&T Wireless said 17oof smartphonecus- quickly becamefrustrated with the numerousdeadspotsand
-o
E
tomersaccountedfor zoVoof the datadrain on its network, poor servicequality on AT&T's network. "Unlimited should
o while its top JVowereusingup 4o7o.Severalrecentsurveys, be unlimited/'he says."When I bought my iPhone,I signed
f including thoseby ConsumerReportsandresearchfirm Yan- a contract with AT&T. Thev haven't upheld their end of the

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bargain. Simply put, I want what I'm paying for." AT&T's
Stankeysays:"I don't thinkyou canhaveanunlimitedmodel
forever with a scarceresource.More people get drunk at an
open bar than a cashbar."
When Rust joined Operation Chokehold, he linked up
with pals Dylan Pine of Nashville and Peter Servenof St.
Louis via socialnetworking. Servenstarteda Facebookgroup
and reservedTwitter usernamesand domain namesrelated
to Chokehold.Within a few days,thousandsof usershad
joined. The Musketeersput togethera central site, drafted
marketing material, and traffrc-copped their Facebookand
Twitter pages.In the final z4 hoursbeforethe plannedopera-
tion, the Musketeerswerefeaturedon CNN. Rustsayshe isn't
finished. He and the Musketeersareworking with developers
to createan online mapping service(andpossibleiPhoneapp
companion)that lets userspost AT&T deadzonesand poor
serviceareasfor everyonetosee.Also ontap: organizing"flash
mobs" to picket AI&T Wireless stores.All three saythey're
eagerlyawaiting a VerizoniPhone.
Musketeers,Chokeholders,and other critics want AI&T
to spendtoimproveits network.Wirelessis byfar its fastest-
growing division, contributing 44Eoof total revenuein zo 09,
up from367oin zo07. But overallcapital spendinghasn'tkept
pace,fallingfrom gzo.3billion in zoo8 to gt7billion last year.
AT&T vowed in |anuary to boost 2o1o wireless spendingby
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IN DEPTH
In December.Alix as much as gz billion. "We
filed a complaint think it's a start, but not
against AT&Tover
problems with its
much more than that," says
landlinenetwork TownHall's Hallaren, who
contendsthat AI&T would
haveto spend95billion to 97billion to bring its
network up to Verizon's quality. AT&T rejects
an apples-to-apples comparisonwith Veri-
zon. "For someoneto sit outsideour business
and try to derive a relative investment val-
ue-I can't imagineanyonetrying to do thati'
saysStankey.
Evenif AT&T were willing to boost its wire-
less network investment significantly,figur-
ing out precisely how much to spend without
sacriflcing profits would be hard. Craig Mof-
fett, a telecomanalystat BernsteinResearch,
has analyzedvarious scenarios.His findings:
If AT&T were to triple its capital spending on
wireless,thevalueof aniPhonecustomertothe
companywould be halved.A sixfold increase
in spendingwould make all iPhone customers
worthless to AT&T. StankeydisputesMoffett's
conclusionsbut agreeswith "the thought pro-
cessthat we needa return on capital."
LIMITINGACCESS
Instead of betting big on new investment or
aggressivelyraising prices,AT&T is choosinga
controversialthird way: It's trying to limit the
iPhonefeaturescustomerscanuse.The com-
pany prohibits Webcastsand file sharing on
its unlimited data plans, activities someother
carriersallow, "We needto be ableto manageour traffrc,"says
Stankey."You can't haveeverybodywatching YouTubedur-
ing an emergency."The Net Neutrality movement disagrees
with that reasoning."We're at a critical moment,"saysBen
Scott,policy directorof FreePress,a nonpartisangroupthat
arguestelecomprovidersshouldhaveno ability to limit their
customerstnetwork access.ttDo we as a country invest in
bandwidth,orthe networktoolsto limit bandwidth?"
AT&T alsotakesa hard line on iPhone"tethering," the pro-
cessby which usershook up a computerto a smartphoneto
gainNet access.Most carriersallow tethering for a small fee.
AT&T does,too, but not for the iPhone;instead,iPhonecus-
tomerswho want laptop Net accessmust pay at least g4o a
month for a separatemobile laptop deviceand data account.
Mackay Bell, a 39-year-old freelancewriter in Los Angeles,
sayshe's "pissedoff " that AT&T won't let him tether. "It's
ridiculous that I should haveto get a USBtoggle and pay so
much extraj' he says.His blog, at attcritic.blogspot.com,fea-
turesthe AT&T logoasDr. Evil from the Austin Powersmovies.
Bellsayshewould jump atthe chancetohaveaVerizoniPhone.
AT&T saysit plansto offer iPhonetethering,but for now, says
Stankey,"Youdon't wantto throwmore gasolineonthe fue."
The Mackay Bells of the world wouldn't be so worrisome q
for AI&T wereits once-mighty landlinebusinessstill strong. z
s
But Bernsteinestimatesthat the unit's profit marginswill fall o
 I ND E P T H

Rust a student cut saythey've had chronic soundprob-

in Virginia,uses lems with U-Verseand are considering
social networking
to planconsumer
switching to cable.In December,Alix filed
protests a complaintontheirbehalfwith Connect-
icut'sPublicUtilitiesControlDept.andon
]an. 4 senta letter to StateAttorney GeneralRichardBlumen-
thal. "What was most unsettling to me was that AI&T never
seemedtolistento what I hadto say,neveracknowledgedthat
the fault lay with them insteadof with our hardwareand wir-
ing, and that they wastedso much of my time j' saysAlix.
Yet AT&T can't afford to redoubleits landline efforts now,
becauseabiggerwaris flaringup inwireless.ForyearsVerizon
hadresistedcutting its wirelessprices,but on fan. r5it slashed
the monthly rate on its unlimited calling plan from $99.99 to
$6S.Sg.AT&T quicklymatchedthe offerfor all its cellphone
products,eventhe iPhone.The upshot?An iPhonecustomer
who had beenpaying 9149.99a month for unlimited calling,
Web-browsing,and text servicenow paysjust 9rr9.99. "We
obviously want to remain competitive/' saysAI&T Wireless
spokesmanMark Siegel.
With customers in open revolt, AT&T's definition of
"competitive"-modestly loweringpricesandraisinginvest-
ment spending-might not be enoughto staveoff Verizon.
"I'm not awareof any companyin this country that has had
so aloof a stancetoward quality of service/' Rich Doherty of
The EnvisioneeringGroup, a Seaford(N.Y.)telecom market
researchfirm, saysof AT&T. "And that's after two and a half
from3zVo today to z67oin three years,which translatesto a yearsof fronting the world's most elegantand entertaining
$3.6billion plungein that segment'soperatingincome.Like handhelddatadevice."
the rest of the telephoneindustry, AI&T is being hit hard by Maybelosing somecustomersto Verizonwouldn't be the
the growingshareof householdsopting for only cellphones.It worst thing for AT&T. Its data network could use a breather.
alsohasbeenbuffetedby competition from cablecompanies, And AT&T wouldn't mind seeingVerizonstrain under the
which bundle phone serviceas part of their phone, Net, and weight of iPhoneNation. Soonafter OperationChokeholdhit
TV packages.Upgradingphone lines to competewith cable theblogosphere,Verizonsignaledthatit wasreadyforApple's
companiesisn't cheap.FiOShasgonefrom zerocustomersto business.Sureaboutthat?| BwI
3.5million in five years-but to get there,Verizonis investing - With Ar ih HesseldahlandDianeBradv
morethan gz3billion in fiber-opticwires.

FRAYING TANDLINE
Giventhe economicsof landline telecommunications,it's
little wonder AT&T hasn't made a market-alteringinvest-
ment in its U-Verseservice.The companyhasn't divulged
how much it has devotedto date, but saysit has invested
lessthan half of what Verizonhasspentper customerhome.
CreditSights'Zhao placesthe total U-Verseinvestmentin
the vicinity of gto billion. AT&T concedesthat it won't be
rolling out U-Verseto rooToof its homesandwill opt instead
to resellthird-party satellitetelevisionin the homesit isn't
rewiring. "Instead ofbundling a good valueproposition to
keep customersaway from the cabletriple play, they adopt
half-bakedsolutions/'saysZhao.BruceKushnick,chairman
of TeleTruth,a consumer-advocacy group,callsU-Verse"a
cheapcopperafterthought"and faults AI&T for neglecting
its stillsubstantialnumberof landline-onlyhouseholds. Says
Stankey:"We're having an awfullot of successfor something
that's an afterthoughtJ'
Not all the feedbackhasbeenpositive.AdamAlix, zo, is a
fffirxchange
Read, save, and add content on
BW's Web z,o tooic network
iNeedYou,AT&T
It wasn't all oohs and aahs during iPad'sintroductiop.There
were also groanswhen news broke that AT&Twould be
the officialserviceproviderfor Apple's much anticipated
tablet computer. But a Jan. 27 anicle in PC Magazine
I
argues that Steve Jobs has five good reasons to stick with
AT&T.Here'sone: GSM, the technologyused by AT&T is
the most prevalent standard worldwide and is therefore key
to Apple's internationalexpansionplans.Another:Verizon,
which is AT&T'smain rival,has been supplementingits own
lineupof smartphoneswith additionsfrom Android and
Palm.So the carriercould probablydo without the spike in
data traffic that a host of iPad users would bring,
o
To read the PC Magazine story,go to http://bx.business- z
weekcom/a ppl e/ ret erence / I
I

NortheasternUniversity studentwhoseparentsin Connecti- F

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