AT&T's iPhone Mojo Won't Last, Better Fix Slow DSL

— -- The news items about AT&T payment to Apple for the iPhone, and Comcast's announcement of faster broadband tiers, are related. Very. Certainly Apple and Comcast will benefit from the announcements. But for AT&T it's a statement about the way it has chosen to invest, and to ultimately remain relevant. While it spends megabucks on the iPhone and 3G network, its home broadband service remains painfully slow--and the effects are showing.

AT&T has paid (Apple) $900 million to help new wireless customers buy iPhones. It hopes to make that money back through the monthly fees those customers pay for network access and additional services, like music, video, etc. AT&T also pays for the right to be the only wireless carrier to support the iPhone through 2010. Meanwhile Verizon has already begun talking to Apple about selling the iPhone for its network after that time. AT&T also spent megabucks to build out its new 3G network to make services delivered on the iPhone faster, funner and more useful.

The results of AT&T's deal with Apple (and the $900 million pricetag) have had mixed effects on AT&T's quarterly earnings, which were reported yesterday. The carrier's wireless business is doing well; it reported an addition of 2.4 million new iPhones to its network, bringing its total wireless subscriber count to 74.9 million (it's the largest U.S. wireless provider).

Still, even if it comes to pass that AT&T's $900 iPhone gambit was worth it (and plenty of AT&T investors are finding that idea tough to swallow today), the carrier is still in the position of being lapped by Verizon and Comcast when it comes to fast broadband. And AT&T has said that broadband is supposed to replace voice service as its primary revenue driver.

AT&T's top speeds for residential download speeds max out at 6 Mbps. But many of AT&T customers get service slower than that--where I live, the fastest service tier is 1.5 Mbps.

Meanwhile, AT&T's residential broadband peers seem to be escalating a broadband speed war that is certainly good news for U.S. consumers.

Comcast just announced a new service tier called Extreme 50, which offers 50 Mbps of downstream speed and up to 10 Mbps of upstream speed for $139.95 per month. Comcast also says it will increase the top speeds of its other service tiers.

In pumping up its broadband speeds, Comcast is clearly responding to Verizon's successful fiber optic-powered FiOS data and video services. Comcast debuts its new speeds on the East Coast in territories that mostly overlap Verizon FiOS territories. Comcast also matches the fastest (download) speed offered by FiOS--50 Mbps.

Sure, AT&T has its own fiber optic initiative, U-Verse. And it has been expanding the availability of U-verse to more and more parts of the country for a few years now. But U-verse brings that fast fiber only to "nodes" in the neighborhood of users, not all the way to the house, as FiOS does. As such, U-verse can pump out only about 25 Mbps of bandwidth to a single household--and that must be used for both data and video service.

At some point AT&T must begin to suffer as a result of not aggressively updating its ADSL technology to deliver higher broadband speeds. In fact, I would argue, AT&T is already suffering. Let's face it--people are streaming a lot of video and other high-bandwidth services, and it's only going to increase. So people are much more likely to buy the fastest broadband service available. Analysts tell us that people often also buy their phone and TV services (in a bundle) from the carrier that can provide the best broadband service value.

And the numbers bear all of this out. In the second quarter of this year 80 percent of new broadband subscribers chose cable service. AT&T said yesterday it signed up only about 149,000 new customers in the third quarter, compared to the half million it signed up in the third quarter of 2007.

AT&T is going to face enormous pressure to bring its broadband service into the 21st century. With the mojo bought with its exclusive deal for the iPhone going away in 2010, it better do something fast.