AT&T Needs to Raise the Bar

With Its Exclusivity Window for IPhone Fast Closing, Carrier Must Fix Service Woes

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SAN FRANCISCO ( -- Joe Wilson, a part-time comedian in Los Angeles, has mostly given up on his iPhone for making calls because he can't get decent reception on the network of AT&T, its exclusive U.S. carrier. After wrangling unsuccessfully with a service rep to raise his allowance for text messages -- on which he relies heavily because voice doesn't work -- Mr. Wilson's resentment toward his carrier has only multiplied.

Despite that, Mr. Wilson is staying with AT&T, because he doesn't want to part with his iPhone. The moment the Apple phone becomes available at another carrier, however, Mr. Wilson said he'll ditch AT&T "faster than [Apple CEO] Steve Jobs chooses a black turtleneck."

Mr. Wilson's story is hardly unique. Many among the iPhone faithful are reluctantly tethered to the No. 2 U.S. carrier, as evidenced by reams of online comments by former and current disgruntled AT&T iPhone users. Many berate AT&T for its service shortcomings, while others bemoan Verizon for not having an iPhone. "The minute the phone becomes available on other carriers -- if indeed it does -- I would expect a lot of people to bolt from AT&T," said Rob Frankel, a consultant and author of numerous branding books. "This is as much of a branding issue as anything. Think of AT&T as the Microsoft of telecom: People use it because they have to, not because they've chosen to."

But they might not for much longer. As AT&T's window of iPhone exclusivity closes in, there are rumored talks between Verizon and Apple; Sanford Bernstein estimates that Apple stands to more than double its iPhone sales if it recruits Verizon to sell its handsets. With the iPhone its biggest business driver, AT&T has to fix its service, and its image, before its contract expires in 2010 or risk losing hordes of customers to rivals. Put in terms of AT&T's advertising parlance, it must make sure those more bars in more places actually deliver.

IPhone pros and cons
There's a lot at stake. Between the first launch in June 2007 and the end of the first quarter, AT&T activated 8.5 million iPhones. Sanford Bernstein estimates that 11% to 12% of AT&T's total contract subscribers use the iPhone while within AT&T's smartphone user base, Bernstein analysts estimate iPhone's penetration to be 35%.

Not only does the iPhone attract new subscribers -- it accounts for 40% of AT&T's new sign-ons -- it helps keep them in the fold. In the four quarters before AT&T sold the iPhone, the cancellation rate, or churn, among its contract customers averaged 1.4%. Today, that rate is 1.2%. Moreover, those subscribers are among its most profitable, as iPhone users generate 1.6 times more revenue than the average AT&T wireless subscribers.

Yet the iPhone's very popularity has also worked against AT&T. While it's given the carrier twice as many smartphone users as its competitors, the carrier underestimated the data usage demand of all those iPhoners using the handsets the way they use computers, to surf the web and watch YouTube videos -- all the things that chew up mobile bandwidth and undermine AT&T's fastest 3G network proposition.

Experts say the telco has to better manage expectations or risk brand erosion. Its ad claim of having the fastest 3G network is likely based on fact, if only because Verizon has lived with it, but to consumers it's meaningless if downloading a mobile video takes longer than pouring molasses.

"Branding will remain ... aspirational, but when the gap between who they are and who they say they are becomes too vast, messaging will only serve to accentuate flaws and erode brand value," said Ryan Durant, principal partner at OVO.

Essentially, that ad campaign becomes self-defeating. "Because of their [fastest-3G-network campaign], people have expectations of a fast network. If they don't deliver, customers will be dissatisfied, which could lead to higher churn," said Bill Ho, wireless research director at Current Analysis.

Mark Siegel, AT&T's exec director-media relations, said: "We stand behind our claims, which are based on extensive third-party research by highly respected firms."

To be fair, every carrier has its share of complaining customers, but one danger for AT&T is that iPhone users -- the savvy, passionate and engaged early-adopter-thought leaders that they are -- can generate disproportionate word-of-mouth and radiate their influence accordingly. Social media ad network BuzzLogic found that AT&T's data plan for the iPhone is discussed in 23% of the influential online conversations -- much more than those of any other smartphone, though negative tones hang over more than half of those conversations.

What's more, a survey conducted by Penn, Schoen, & Berland Associates in May for a Wall Street Journal conference showed the top reason 21% of Americans resist the call of the iPhone is because of AT&T. These people say they don't have an iPhone because they don't want to use AT&T as a service provider, according to the survey of 1,005 people 18 and over.

All this presents A&T an opportunity to re-articulate its brand proposition. Mr. Frankel advised AT&T to take some cues from another of its agency BBDO's clients, FedEx, which never did any chest-pounding about how many trucks and planes it had. The delivery company's message was consistently about knowing how important the package is to the customer's business and that's why FedEx works hard to get it there.

Others say AT&T should focus on service. "It's not too late for them to improve their image," said Alan Siegel, CEO of Siegel & Gale. "They've got to learn how to talk to people and make sure they have top-level service at every point of contact."

For its part, the carrier announced it was upgrading its network as well as its footprint to dramatically boost coverage. An AT&T spokeswoman said the company was working to expand the scope of a pilot program to monitor and respond to customer service issues voiced on social media channels.

Mr. Siegel points to numbers that show increasing consumer loyalty and said the company isn't pinning its future on just one device, given its broad portfolio of smartphones. "We have a great network. It is simply not possible for us to achieve the results we have absent a great network. The industry's just too competitive with too many choices. The sheerest indication of that is churn, and we have among the lowest churn in the industry," he said. "That's voting with their feet."

Mr. Siegel also said he took a somewhat different view of the negative feedback from iPhone users venting online. "I see a passionate group of users providing feedback. And part of the passionate use [among iPhone users] results in spending every month that hits 1.6 times higher than what we see typically with our customers."

AT&T CEO Randall Stephenson told a Wall Street Journal conference in May that the volume of data usage on its 3G network was higher than what AT&T expected early on, but he said the carrier was addressing the issue. "We're feeling pretty good about our ability to manage the volumes, the data and behavioral changes in the network that we're seeing as a result of these kinds of devices," he said.

"They're in a tough situation right now because they're still building their 3G network," said Current Analysis' Mr. Ho. "They need to plead the case in the technology media where the early adopters go, and recruit more advocates that defend them in social media."

Getting the word out
Rene Ritchie, who edits the and sees weekly postings about poor AT&T service, said the carrier should announce plans to upgrade its 3G network directly to its customers, rather than simply issue a press release. "It's really the first consumer success story for the smartphone category, and they expect flawless service," Mr. Ritchie said. He suggests AT&T communicate its 3G enhancement plans by texting customers or stuffing a notice in their bill, and using language that's grounded in consumer experiences, such as "we're going to improve your wireless connections or raise the speed of your web downloads."

To retain its current iPhone customers, Bob Rosenberg, who heads up Insight Research, suggests that AT&T lower the price of the iPhone monthly service plans. "They can work this from both ends: attract new customers and make it up to existing customers by offering them a year's worth of discounts. They'll lose margins but it will be made up for by the large numbers of new customers."

AT&T may already be on that path, as a recent BusinessWeek article said it is currently mulling revisions to its iPhone service pricing, citing people familiar with the carrier's thinking.

While AT&T may have to resign itself to losing some iPhone customers eventually, the lesson is to contain the service issues before the customer loses faith altogether. "Whatever it is that they're going to Band-Aid the situation, it's a little too late," said Mr. Wilson. "I'm paying $90 for a phone I can barely use. Consumers have a memory."

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