AT&T: 'We're All About Wireless'

U.S. iPhone fans will have to use AT&T until at least 2010, sources say.

DALLAS -- Wonder why the smoking-hot 3G Apple iPhone only costs $199, less than half the price of the original? Here's a two-word hint: Randall Stephenson.

Stephenson, who became AT&T's chairman and CEO a year ago, championed the idea of paying Apple about $300 per device, analysts estimate, to help hold down the retail cost. The subsidy, which replaces another arrangement that gave Apple a portion of iPhone service revenue, will dilute earnings through 2009, AT&T says.

On the plus side for consumers, the iPhone is now extremely affordable. At $199, the 3G iPhone costs about the same as a high-end cellphone. AT&T says it plans to offer an unsubsidized iPhone later. Cost: $599 to $699, depending on memory, putting it well beyond the reach of average wireless users.

It remains to be seen if AT&T's gamble will pay off. One thing is clear: Thanks to the iPhone, the smartphone game has changed dramatically. And so have consumer perceptions of the mobile Web, a netherworld that seemed downright hostile before the iPhone showed up.

AT&T's role in the iPhone's success could cement its place as the premier cellphone carrier in the USA. It's already helped raise AT&T's cool factor, a big deal among tweens, teens and other Web-centric customers. That's no small feat considering the brand's age — more than 120 years and counting.

The iPhone has a huge impact on carriers, which tried for years to sell consumers on the idea of wireless data, says Charles Golvin, a senior wireless analyst at Forrester. "Then Apple came along and, in a 30-second commercial, they just made it dead simple," he says. That simplicity, married to the sleek iPhone design and Web-friendly function, has energized consumers, he says. It's also raised the bar globally for carriers and established handset makers, he adds.

You'll get no argument from Stephenson. In a sit-down interview, he says the iPhone is central to what he sees as an ongoing transformation of AT&T. His goal: Turn the iconic company into a wireless goliath with global reach and intense customer loyalty.

"The iPhone has repositioned AT&T as the premier wireless brand in the world," Stephenson says. He quickly adds, for emphasis: "We're all about wireless."

And, so, apparently, is Stephenson. One of his first acts as CEO was to ask the AT&T board to approve the $2.5 billion purchase of Aloha Partners, a privately held wireless partnership. It wasn't the easiest pitch to make: Aloha had no operations, revenue or customers.

But it did have one thing Stephenson wanted badly: a hoard of national wireless licenses that could buck up AT&T's mobile Web plans. The deal was approved.

Spend time with Stephenson, and it becomes clear that he's a devout believer in the power of mobile to change AT&T and, by extension, the global community it serves. He even has a mantra for the new AT&T: "mobilization." That's CEO-speak for the idea of making all services — voice, data and video — available on mobile handsets.

As consumers obtain easy, fast access to the Internet, Stephenson believes, e-commerce will ratchet up significantly, lifting whole economies in the process. That, in turn, can help improve the lives of consumers everywhere, he says.

"This changes what you see and how people interact, socialize and communicate," he says, holding his ever-present iPhone aloft.

'Everything we hoped it would be'

Stephenson has long been a champion of wireless. In 2005, he was quick to lend his support to an idea, first raised by Cingular CEO Stan Sigman, to pursue a handset deal with Apple. (Cingular, which no longer exists, was a joint venture with BellSouth; both are now owned by AT&T.) Other telecoms, including Verizon, passed because Apple was demanding control of marketing, pricing and more. AT&T didn't blink, however, and the iPhone partnership was born.

The iPhone might seem like a no-brainer now, but back then it was little more than a concept, with no name, design plan or software operating system. And it was offered by a computer company that had zip experience in wireless.

But the idea did have one thing going for it: Apple CEO Steve Jobs. The Apple chief was convinced he could design a better smartphone, one that would make it easy — and fun — to use the mobile Web, which was just emerging. Stephenson says that's all he needed to hear.

"We're not betting on the handset," he says, reflecting on that fateful 2005 decision to lock arms with Apple. "We're betting on Jobs."

Golvin gives kudos to Stephenson for his deft handling of the Apple partnership. AT&T, he notes, is "renowned for the amount of control" it typically exercises over new products. With the iPhone, however, "AT&T essentially surrendered to Apple."

"To me, that was the standout of the whole iPhone deal," Golvin says. It also signaled a new way of doing business under Stephenson.

So far, the iPhone has been a good bet. Since its debut in June 2007, more than 6 million have been sold worldwide, putting it on track to sell 10 million units by the end of the year.

The 3G version hasn't disappointed. More than 1 million were sold the first weekend. And the burn continues. In the first 12 days, AT&T says 3G sales were double the level of the original, suggesting to some analysts that lightning has, indeed, struck twice.

"We believe that over the long term, the subsidized iPhone 3G will drive increased sales volume and revenues among high-quality, data-centric customers," telecom analyst Tom Seitz of Lehman Bros. recently wrote in a note to investors.

Simon Flannery, a senior telecom analyst at Morgan Stanley, agreed. "The $199 price point should be a big hit with consumers," he said.

U.S. sales figures aren't broken out separately. But AT&T in January said it had sold more than 2 million of the original devices. That makes the iPhone its most popular smartphone, by far.

Stephenson, a polite Oklahoman, isn't prone to self congratulations. But the iPhone's success is clearly a point of pride. "It's everything we hoped it would be," he says.

New demographic: Everyone

AT&T's share price is another matter. Owing to several factors, including the subsidy, some investors have lately been pounding the stock. The gloomy U.S. economic climate hasn't helped. AT&T shares closed Thursday at $30.81, down 10 cents. That's a far cry from its 52-week high of $42.97.

Stephenson allows that the haircut hurts, but he's also standing firm on his wireless strategy. "The $199 price point is where demand leaps," he says. "This is going to bring in a whole new demographic."

That "demographic" isn't actually a demographic; it's mainstream America. So long as the iPhone had a hefty price tag, Stephenson says, he and Jobs feared it would never become a mass-market item. With a price of less than $200, however, they thought the iPhone could finally jump into the mainstream. "It seemed like an opportunity to change the game," he says.

AT&T also gets some serious lift. As with the original iPhone, 3G customers must sign a two-year wireless contract. Existing AT&T customers have to re-up for two years. (When the unsubsidized iPhone makes its debut — date unknown — contracts won't be required.)

Those who want to surf the mobile Web — and why else buy an iPhone? — also must buy a data plan. Total cost: around $100 a month. That's almost double the $55 generated by the average AT&T wireless customer.

"You just don't find many opportunities like that," Stephenson says.

Roger Entner, a senior vice president at Nielsen IAG, agrees. "It's a no-brainer that if you bring down cost, more people will buy it," he says. If the iPhone cost less than $100, he adds, "it would sell even better."

As for that fat subsidy: Painful in the short run but a shrewd long-term move, Golvin says.

Why: The U.S. cellphone market is rapidly approaching "saturation" — meaning everybody who wants a cellphone already has one. To add subscribers, he says, carriers basically have to steal them from each other. That's where the iPhone could come in handy, he says.

In exchange for its payout, AT&T got a year extension, into 2010, on its exclusive distribution deal with Apple, people familiar with the matter say. Sources asked to not be named because the terms are confidential.

Under the original iPhone contract, Apple had the right to offer the device to other carriers beginning in 2009. If Apple exercised that clause, AT&T would have lost one of its biggest points of leverage with customers — exclusive access to the iPhone. Nailing the extension "is a very big deal," Entner says.

Stephenson declined to discuss the contract, saying only that he is "very happy" with the arrangement.

Standing firm on a vision

Stephenson might be new to the CEO's office, but he's an old hand at the telecom game. Prior to taking the top job a year ago, Stephenson was the No. 2 to the company's longtime chairman and CEO, Edward Whitacre Jr.

Whitacre's 17-year run was defined by deals — big, sweeping mergers that dramatically recarved the competitive landscape. By the time he stepped down, he'd transformed the smallest of the original seven Bells — Southwestern, later called SBC Communications — into the USA's largest telecom. It also had a new name: AT&T, one of Whitacre's final acquisitions. The Apple partnership also was formed on Whitacre's watch.

Stephenson, who served as chief financial officer and chief operating officer under Whitacre, rode herd on many of those deals. Stephenson says his former boss taught him a lot about the importance of standing firm on a vision and taking the long-term view. It's a mindset and a business approach that continues, he says.

Sounding a lot like his former boss, Stephenson says it takes grit, a steady vision and, at times, a strong stomach to grab opportunity by the throat. That's true, he says, whether the goal is a new partnership or a big global acquisition.

"If you're not pushing forward hard, nothing happens," Stephenson says. "You don't do that by making little incremental moves. You've got to make big moves." Considering his words, he quickly adds, "You've just got to be right more than you're wrong."