The Smartphone Wars: AT&#038;T CEO reveals all
<p>Well, well, <em>well</em>.  A hot-off-the-press AP article, <a href="http://www.physorg.com/news/2011-01-att-ceo-android.html">&#8220;AT&#038;T CEO: We&#8217;ll push Android phones&#8221;</a>, finally sheds light on the vexing question of why AT&#038;T let Apple out of its exclusive a year early.  It&#8217;s just stuffed full of revelations, but the implication the reporter fails to draw is bigger than any of the fascinating facts on exhibit.</p>
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<p>AT&#038;T letting the iPhone go looked mysterious because most of us &#8211; including Android fans like myself &#8211; accepted the premise that the iPhone is a significant marketing advantage for any carrier that has it, generating lots of premium business (high-margin sales to relatively price-insensitive customers).  But now it looks like that&#8217;s not true &#8211; and furthermore, Apple may have been pushed out of its exclusive as much as it jumped.</p>
<p>From the article: &#8220;AT&#038;T [...] signed up a net of just 400,000 new customers on contract-based wireless plans in the last three months of last year. It was the lowest quarterly number in at least five years.&#8221; This is pretty shocking in general, and has very specific implications about the state of the iPhone brand.  The first Christmas season after the iPhone 4 release should have been a banner quarter for the product, with heavy Apple and AT&#038;T marketing leading to a healthy bump in new AT&#038;T sales.  But this didn&#8217;t happen. </p>
<p>We already knew that AT&#038;T has plans to introduce a dozen Android phones over the next year.  Now its CEO says it will be marketing them aggressively.  The implication is clear: AT&#038;T believes joining the Android army will boost its flagging new-contract numbers.  (One may safely guess that this is also a bid to increase profit margins by lowering the per-phone cost-of-goods.)</p>
<p>The article says &#8220;the iconic [iPhone] has lost much of its power to attract customers from other carriers&#8221;.  Evidently; viewed in that light, that 400K new-contracts number, on volume of 4.1 million iPhones activated, is a <em>disaster</em>.   Best case for Apple, if those were <em>all</em> iPhones, would be that the market that AT&#038;T can reach is about 90% saturated, with sales of the device coming almost entirely from repeat customers.  Since we know AT&#038;T&#8217;s product mix isn&#8217;t all iPhone, the actual saturation percentage is higher and number of new iPhone customers is lower.  </p>
<p>My mind is just boggling.  Far from scoring a coup, Verizon may have just bought the biggest bag of substanceless hype and wind Steve Jobs has ever peddled while AT&#038;T snickers behind its hand.  The iPhone brand is in worse shape than I thought was even possible.  And the implications of that are huge.</p>
<p>First: We can expect Verizon&#8217;s iPhone sales to be anemic.  A bit of arithmetic applied to <a href="http://www.deadzones.com/2010/05/customer-churn-coverage-vscontracts.html">this chart</a> tells us Verizon has been churning about  93M * 1.42% * 3 = 396K customers a quarter &#8211; about the same as that deadly 400K.  The smart way to bet is that most of Verizon&#8217;s potential Apple customers decamped to AT&#038;T long ago and are part of that 90% saturation.</p>
<p>Second: Anybody betting their dollars or reputation that Apple&#8217;s &#8220;superior user experience&#8221; would guarantee it perpetually increasing market share just took it on the chin, hard. AT&#038;T&#8217;s CEO has just told us as plainly as a CEO ever does that that theory is busted.  AT&#038;T&#8217;s bet is on Android now.</p>
<p>Third:  The iPhone is in <em>deep</em> trouble.  4.1 million activations looks like a lot, but any product manager will tell you that in a market moving as fast as smartphones, a product with less that 10% new customers in a quarter is usually only a few quarters from market share decline. Comparing this to the 600% quarter-over-quarter growth rates Android has been posting just doesn&#8217;t look good.</p>
<p>Over a year ago, when Android was shiny-new and I was just beginning to analyze the smartphone market, I predicted that the ubiquity game would beat the control game.  This has since been happening at a rate even my boldest predictions couldn&#8217;t keep up with, and the accelerator pedal just got another stomp.</p>
<p>UPDATE: The article allows us to total up AT&#038;T iOS activations (counting iPads) at about 4.5M for the quarter.  Google says it&#8217;s activating Android devices at a rate of 200K * 90 = 18M per quarter.  Conclusion: Android is outrunning iOS at a 4:1 ratio.</p>
<p>UPDATE2: UPDATE was incorrect.  First, turns out it&#8217;s 300K or 24M Android devices per quarter, but that&#8217;s a worldwide number rather than a U.S. one.  So to compute the actual ratio we need to know the percentage of Android sales going overseas. If it&#8217;s 33% or less &#8211; which seems likely based on press reports of &#8220;more limited&#8221; overseas sales &#8211; 4:1 or more is still right.  </p>
