Well, well, well. A hot-off-the-press AP article, “AT&T CEO: We’ll push Android phones”, finally sheds light on the vexing question of why AT&T let Apple out of its exclusive a year early. It’s just stuffed full of revelations, but the implication the reporter fails to draw is bigger than any of the fascinating facts on exhibit.
AT&T letting the iPhone go looked mysterious because most of us – including Android fans like myself – 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’s not true – and furthermore, Apple may have been pushed out of its exclusive as much as it jumped.
From the article: “AT&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.” 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&T marketing leading to a healthy bump in new AT&T sales. But this didn’t happen.
We already knew that AT&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&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.)
The article says “the iconic [iPhone] has lost much of its power to attract customers from other carriers”. Evidently; viewed in that light, that 400K new-contracts number, on volume of 4.1 million iPhones activated, is a disaster. Best case for Apple, if those were all iPhones, would be that the market that AT&T can reach is about 90% saturated, with sales of the device coming almost entirely from repeat customers. Since we know AT&T’s product mix isn’t all iPhone, the actual saturation percentage is higher and number of new iPhone customers is lower.
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&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.
First: We can expect Verizon’s iPhone sales to be anemic. A bit of arithmetic applied to this chart tells us Verizon has been churning about 93M * 1.42% * 3 = 396K customers a quarter – about the same as that deadly 400K. The smart way to bet is that most of Verizon’s potential Apple customers decamped to AT&T long ago and are part of that 90% saturation.
Second: Anybody betting their dollars or reputation that Apple’s “superior user experience” would guarantee it perpetually increasing market share just took it on the chin, hard. AT&T’s CEO has just told us as plainly as a CEO ever does that that theory is busted. AT&T’s bet is on Android now.
Third: The iPhone is in deep 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’t look good.
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’t keep up with, and the accelerator pedal just got another stomp.
UPDATE: The article allows us to total up AT&T iOS activations (counting iPads) at about 4.5M for the quarter. Google says it’s activating Android devices at a rate of 200K * 90 = 18M per quarter. Conclusion: Android is outrunning iOS at a 4:1 ratio.
UPDATE2: UPDATE was incorrect. First, turns out it’s 300K or 24M Android devices per quarter, but that’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’s 33% or less – which seems likely based on press reports of “more limited” overseas sales – 4:1 or more is still right.