Apple

With its large subsidies to Apple, AT&T doesn't break even on iPhone accounts with high data-usage until the 17th month of a 24-month contract, according to a new report from Yankee Group.

The report, titled "The Golden Subsidy Egg's Goose is Cooked: Welcome to the Brave New Subsidy-Free World," looks at the downside of subsidies paid to manufacturers by cell phone carriers. The report cites AT&T's iPhone contract with Apple as a prime example.

Subsidies have typically helped mobile carriers offer customers free or low-cost devices in order to lure them into buying long-term service contracts. Smartphone owners are happy because they're getting the latest devices at rock-bottom prices. But the surge in data use and the rising cost of grabbing new customers are cutting profit margins for providers, says Yankee Group.

With the mid-2008 launch of the iPhone 3G, AT&T struck a subsidy deal with Apple that slashed the price to consumers to $199 for the low-end version but forced the carrier to bear the upfont costs of each unit. Several published reports have estimated that AT&T's subsidy is at least $300 per phone. (Neither AT&T nor Apple responded to requests for confirmation.)

At the time, AT&T acknowledged that the new deal would impact profit margins and dilute earnings. The company's second-quarter results did show a dip in both revenue and earnings.

AT&T went along with the subsidy because it felt that lower iPhone prices would bring in more customers. But in a catch-22, more customers have also put a strain on the carrier's network, both for voice and data. Ralph de la Vega, CEO of AT&T Mobility and Consumer Markets, said in August that AT&T's wireless data usage jumped almost 5,000 percent from 2006 to 2009.

That strain has made for some unhappy iPhone users and has forced AT&T to scramble in order to beef up its wireless infrastructure.

Removing the subsidy for AT&T would win the company a total return of 33 percent over a two-year contract and reduce the break-even point to eight months, Yankee Group said.

Moreover, unless mobile carriers in general can cut their reliance on subsidies, Yankee Group noted, they may see profit margins fall even further.

"Until now, North American operators have been kings of the devices market, controlling distribution and bearing many of the risks," Andy Castonguay, Yankee Group director and author of the report, said Thursday in a statement. "Rising customer acquisition costs, exclusivity fees and flat-rate pricing are squeezing margins for coveted smartphone users. To reverse this trend, operators must spread the control and risks across OEMs and retailers to offer more affordable options and establish greater levels of clarity and trust with consumers."

Below is a graphic from Yankee Group's report:

AT&T on Tuesday said it has made the necessary changes to enable voice over IP iPhone apps to run on its wireless network.

Before Tuesday, VoIP apps would only work over a Wi-Fi network. In other words, if you wanted to use Skype to call a friend, you had to be connected to a regular Internet wireless network. Once you were out of range of that network, the call would end.

AT&T said it informed Apple and the Federal Communications Commission of its decision Tuesday afternoon. For its part, Apple was quick to react and make its own changes.

"We are very happy that AT&T is now supporting VoIP applications," Apple spokesperson Natalie Kerris said. "We will be amending our developer agreements to get VoIP apps on the App Store and in customers' hands as soon as possible."

There are already quite a few VoIP apps available in the App Store, like Skype, Vonage, and Truphone, but they only work over Wi-Fi. Developers will need to enable the apps to work over AT&T's wireless network and then re-submit them to the App Store.

Of course, the application that everyone will be wondering about is Google Voice. Tuesday's decision may not have much of an effect on that situation because Google Voice isn't really a VoIP application. Google's app still uses your wireless network minutes, but the service does offer other benefits like receiving calls to a single number in multiple places.

MMS on the iPhone photos

As promised, AT&T's iPhone finally has the capability to send multimedia messages to another phone number. Whatever AT&T had to do to gets its act together, the carrier did it.

The update went live just a moment ago, and I've successfully sent my first MMS on CNET's iPhone 3G. I was able to exchange photos both with another iPhone and a Samsung SPH-M330 on Sprint.

You'll need to connect to iTunes to receive the update, which should download in seconds. We were able to send an update immediately, but you may have to restart your iPhone first.

To confirm that your device is ready, go to Settings > General > About. Your carrier version should be "AT&T 5.5," and you'll need the latest iPhone 3.1 software update. Also, remember that owners of the original iPhone will miss out on the fun.

For more information, check out Apple's links for updating and enabling carrier settings. And if you're having problems, see Apple's troubleshooting tips or the MMS send failure fix from iPhone Atlas.

Welcome, AT&T iPhone, to 2003. Now we just need that tethering.

When I sat down to write an article about the unreliable cell reception my iPhone gets on Monday, I knew I wasn't alone in my frustration. Friends and acquaintances often joke that the iPhone is a cool computer but a lousy phone.

But judging from the response I received from the "AT&T takes the phone out of iPhone" story published on Tuesday, I definitely struck a nerve with a lot of iPhone users, not just in San Francisco but around the country. The overwhelming majority of them reported similar problems of frequent and consistent dropped calls and garbled conversations, and even delays with voice messages and voice mail being inaccessible.

Within one work day the article generated more than 300 comments and 150 e-mails, more feedback volume than any story I've written before. I spent much of the day reading them and doing some additional reporting and I've come to some basic understandings that I'd like to share:

This is not a San Francisco-only problem
I neglected to mention in the original story that I never, repeat never get reliable reception on my iPhone in either of my parents' homes in Phoenix. Fortunately the weather is usually pleasant and I can easily step outside to talk.

Meanwhile, criticism of iPhone reception came in from people in dozens of locations. Numerous complaints came from cities like New York, Chicago, Los Angeles, Atlanta, Washington, D.C., Philadelphia, Pittsburgh, San Diego, Seattle, Denver, and Charlotte, N.C. There were complaints from people in Texas, Arizona, Oregon, South Carolina, Florida, Indiana, Colorado, Washington, Ohio, New Jersey, Virginia, Maryland, Utah, Montana, Michigan, Oklahoma, South Carolina, and even Oahu, among other locales.

"What really sucks is that I can circumnavigate the mean back streets of New Delhi with iPhone in hand, email specific scriptures from my ibible or scan songs I've never heard before in a restaurant to find out who the artist is, yet I cannot conduct a PHONE conversation in my own living room or even from my home office while looking out a south-facing window into bright sunshine! I drop 8 out of 10 calls, and sometimes don't get voicemails until a DAY later," wrote a Tulsa, Okla., reader.

"This sounds like a joke, but it is an actual fact: I get better reception and service for my iPhone in a grain silo in my grandmother's rural Indiana farm than I do in my bedroom in Los Angeles. Seriously," wrote another person.

"Recently I was in the emergency room with mother for 12 hours. I had no cell service. Now I have an iPhone 3G and a Blackberry Curve, both with AT&T. Neither worked. Yet the lady next to my mother and a woman across from us both had perfect service. One used Sprint, the other Verizon," another reader wrote.

A San Luis Obispo, Calif., reader said he gets no iPhone 3G reception on many stretches of Highway 101.

"Last Friday I was heading south on 101 at the Cuesta Grade and got stuck in a nightmarish traffic jam due to an accident at the base of the grade," he wrote. "I tried calling my wife to let her know that I was going to be late, but guess what? No cell coverage. That's not the half of it...Apparently a bit up the grade from me, a 71-year-old man had a heart attack...A family member tried calling 911 but as the (San Luis Obispo Tribune) indicated, the call failed. The family member actually flagged down a CHP helicopter that was covering the accident to get help."

Some people complained that even though AT&T claims the coverage in their area is good, their first-hand experience indicates otherwise. A handful said they dropped AT&T and the iPhone because of the poor reception. A couple of people said they chose to modify their iPhones (also known as jailbreaking) so that they could use them on a different carrier's network and that the reception was vastly improved.

"I live in Columbia, SC---no big city here. My damn iPhone drops calls about 75 percent of the time inside my house," wrote another reader. "Definitely an issue with ATTs network, not my house. ATTs web map for the city claims excellent coverage (joke)."

One New Yorker was so moved by the issue that he wrote a letter to AT&T voicing his complaints and then made a video about his experience.

Several Canada iPhone users said they get good reception from Rogers Communications, but one U.K.-based reader said that on the network of iPhone carrier O2 he can't make calls at peak times and voice mails and texts can take more than an hour to arrive.

Not everyone who provided feedback reported a negative experience, but the ratio was about 5-to-1 in agreement with my experience or similar problems. People seemed genuinely grateful to find out that they weren't alone in experiencing these troubles.

It's not just a problem with the iPhone
About two dozen people reported that they had problems with other phones on the AT&T network than the iPhone, and a few noted that other carrier networks also have problems, too.

"You'd have the same problem with any phone using AT&T service," Andrew Seybold, a wireless consultant with Santa Barbara, Calif.-based Andrew Seybold Inc., said in an interview. "In other parts of the country people complain about other networks more than they do about AT&T. It's a very regional thing."

Seybold and Roger Entner, head of telecom research at Nielsen, said AT&T and others were doing what they could to improve the reception situation. But the carriers have been hindered in their efforts by reluctant and slow-moving municipalities whose residents don't want additional cell sites to be installed either because they are unsightly or because of health concerns about the radio frequency emissions, they said.

"In defense of AT&T and all the networks, they have billion-dollar budgets to add more cell sites to get better coverage and add more capacity, but because of city and county planning commission stuff it takes two to three years in most places in the country to get a new cell site put in," Seybold said.

"There is a federal law that says you can't inhibit these towers, but nobody wants to have it in their backyard. But they all want to have perfect wireless service and it doesn't work," Entner said in an interview. "Frequently, the carriers have to go to court to build a tower."

Jonas Ionin, who is with the San Francisco Planning Department, disagreed with that characterization of the situation.

"It is not fair to categorize it (the problem) as the process that's been set up," he said. "I think they are maybe overzealous in their time frame."

San Francisco officials have been working with AT&T to expedite the process to help the carrier meet its commitment to Apple so that new apps roll out by a certain date, according to Ionin. "Their 3G marketing service didn't live up to its billing," he said.

Meanwhile, the city hasn't received a lot of new applications from carriers for new cell sites but has seen applications for modifications to existing sites, he added.

Thick, concrete walls are likely blocking my reception
I found out from an AT&T customer support representative on the phone that my home in San Francisco is in an area with good cell coverage and that I am located right in the middle of four sites, an estimated half-mile away from the nearest one.

"Radio waves don't penetrate building walls very well and if you have tinted windows in an office building, that's near death to a radio signal," said Seybold. "Maybe you're not close enough to a cell site, but you are also competing with others in your area" for reception.

Entner speculated that the calls are dropping as the system tries to offload demand from a cell site I'm using that is getting overwhelmed with peak traffic to another nearby that has less demand at the time. Conversations get garbled when there is an inadequate transfer of the call from one cell site to another.

AT&T is increasing its 850MHz band frequency, which travels longer distances than the current 1900MHz frequency and is better able to penetrate into buildings. But licenses for 850MHz are not automatically granted, according to Seybold, and it's unclear whether that is an option in my neighborhood.

Since the AT&T customer service representative said the company doesn't plan to erect any additional cell sites in my neighborhood, I may have to just wait until AT&T offers a MicroCell signal booster they call femtocell that works by using a customer's home broadband network. The device, which costs $150, is being tested in a public market trial in Charlotte, N.C.

Supposedly there are ways for neighbors to piggyback off the signal, just like with a Wi-Fi, but Seybold said his understanding is that there is a way to secure it.

In the meantime, I could use a Zboost, a type of cell signal booster device that extends coverage in buildings and cars, according to a spokeswoman for the company that makes them, Wi-Ex.

"There's no network in the U.S. that's going to provide adequate indoor coverage for everybody," Seybold said.

AT&T doesn't typically offer refunds for outages, and frequent problems like mine
One reader wrote that he got a $50 refund after complaining to AT&T about his poor iPhone reception, but I had no such luck when I called the company.

"That's not something we're allowed to credit for per our policy," the customer service representative told me when I asked. "Even if the service outage was for three or four days, or a week," he said, noting that customers in Kentucky were not given refunds after an outage caused by a bad ice storm.

Many of my remaining questions, like why exactly I have reception problems and when the femtocell will be available in San Francisco, remain unanswered as I awaited word back from AT&T spokesman Mark Siegel, who had repeatedly insisted that my complaints and those of other iPhone users were not newsworthy. (He claims the increased data traffic from iPhone 3G users is affecting performance, but I use a first-generation iPhone that runs on a different network than does the 3G and on which data and voice traffic are separated.)

I can be patient. I already have been.

A good friend asked me why it took me one and a half years of inadequate iPhone reception to get frustrated enough to cover the issue. I likened the situation to a new boyfriend who so distracts you with his good looks, charm, and intellect that for a while you don't really notice that he's cheating on you--and when you do notice, you keep hoping it will change. However, a relationship that is unreliable and untrustworthy eventually takes its toll, no matter how good other aspects may be.

The honeymoon is definitely over for me and my iPhone, although I'm not sure I'm ready to break up just yet.

Update 7:50 a.m. PDT: I asked Seybold if he consults for AT&T or any other carriers and he said: "I have often but NOT in the area of coverage and have no contracts at this time." I also added that my handset is a first-generation iPhone.

Update 8:50 a.m. PDT: AT&T's Siegel said the company's network technicians have investigated my situation and that of my boyfriend who gets extremely poor 3G iPhone reception in his home. The fact that I live on a hill could be posing challenges to the wireless signal propagation, Siegel wrote in an e-mail.

"Our folks were able to do some fine tuning and you should begin to see a reduction in dropped calls," he said. "We also looked at your friend's location, which I am told is in the Twin Peaks area--apparently a very challenging location for signal propagation. We will continue to see what we can do."

Updated 11:45 a.m. PDT: with Entner explaining how calls can get dropped and garbled.

Correction 3:57 p.m. PDT: This post initially misstated the relative distances the two radio frequencies travel. 850 MHz frequency travels longer distances than 1900 MHz.

Three weeks ago, I got a call on a friend's iPhone while in the middle of a desert; cell phone coverage had come to Burning Man. By contrast, several calls I made last night to my parents from my San Francisco apartment were dropped and a subsequent connection became garbled.

That happens daily when I try to converse on my first-generation iPhone in my apartment and in certain other neighborhoods. I've come to anticipate that if I can even make a call it's likely to be short-lived or poor quality.

Frustrated by the numerous interrupted calls, I decided to try to find out why my iPhone service is so poor that it's easier to have a Web video conference over AIM with my boyfriend because neither of us can use our iPhones (his is 3G) reliably inside either of our homes.

This is not a new problem. AT&T was criticized when traffic from attendees at the South By Southwest conference in Austin, Texas, overwhelmed the network earlier this year. And there were widespread complaints about dropped calls and spotty service after the launch of the iPhone 3G a year ago.

I wondered why, a year later, the service still seemed unreliable. I called AT&T (on my reliable landline at work) to find out. AT&T spokesman Mark Siegel blamed the problem on the increasing amount of data traffic iPhone users are creating, which CNET News and others wrote about earlier this month.

"We lead the industry in smart phones," he said. "As a result, we are having to stay ahead of what is incredible and increasing demand for wireless data services."

I wanted to know specifically why my problems haven't been resolved nearly one-and-a-half years after getting my iPhone and why my voice reception would be impacted by data traffic on a different network. "Well, it wouldn't," Siegel conceded.

Initially, he had suggested that my problems were related to the fact that the first-generation iPhone uses the EDGE data network, which is slower than the 3G network. However, not only am I on a different data network than the 3G data bandwidth hogs, but there should be no connection between general data usage and my voice reception.

Other factors are at play, though, such as proximity to a cell tower, the thickness of walls in the building and amount of demand on the network at the time, according to Siegel.

Asked what AT&T is doing to address the reception problems, Siegel said the company is rolling out 850 MHz frequency, which penetrates walls better than the higher frequency 1900MHz band; adding 2,000 cell towers to increase coverage; beefing up its back-haul capacity that connects the cell towers to the Internet; spending as much as $18 billion this year to upgrade its wireless and broadband networks; and moving to the LTE, or 4G, network standard next year.

"We recognize unique challenges have been posed by all of these smart devices being increasingly used by more and more people and I think we are on the forefront of architecting our network to continue to stay ahead of the demands that those devices place on our network," he said.

Despite listing the improvements AT&T plans to make, Siegel kept insisting that there was no story here; that my concerns and the many comments on the Apple iPhone forums about reception problems and dropped calls was not newsworthy.

While I do have friends who report no problems with their iPhone reception, many of my friends have complaints. I did an informal survey of friends on Facebook and learned that people suffer from dropped calls, as well as inaccessible voice mail and delayed voice messages. Also, I am not alone in being forced to cut back on talking on the phone as a result of the reception problems. Here are some examples of the responses I got:

• "As soon as I move and do not have an ATT bundle, I am throwing the iphone, and ATT in the trash," wrote a San Francisco friend using a first-generation iPhone.

• "When i first got my iPhone (July 2007), i had fine coverage. In the past nine months or so, something changed. Now i have *horrible* reception in my neighborhood, especially in my apartment, and most especially in my bedroom. My phone virtually never rings there, and i almost never get voicemails or text messages until somewhere between 2 minutes and 2 hours after the communication went through," wrote another first-generation Bay Area iPhone user on Facebook.

• "Terrible in SF. Probably 1 out of 3 calls gets dropped," wrote a 3G iPhone user.

• "I've come to use it as a portable computer and a phone only in emergencies. I hardly talk on the phone anymore," another Bay Area friend who has a 3G iPhone told me.

• "My (3G iPhone) won't work inside my house. I'm thinking about selling my house and finding a new one. Until then, I just use the forwarding feature, but it's a pain. And yeah, it means I tend to talk on the iPhone less. It's definitely a problem with my line o' work, although I'm trying to use Google Voice to solve the problem, too," wrote a friend in Arizona.

Siegel was not amused.

"So you are actively asking folks to submit their experiences? Sorry, but you and I have a basic disagreement about why you are doing this story. What is the news here beyond what others have covered?" he wrote in an e-mail.

Maybe I should pose that question to all the iPhone users who can't make a basic phone call with their phones much of the time.

Siegel said he would look into my particular situation. I hope he does and if so, I'll let you know what I find out.

While I can't speak for other parts of the country, there do seem to be problems in San Francisco at least. This is significant given the high percentage of iPhone users in the area.

What's your experience?

After receiving hundreds of reader e-mails and comments to this article I decided to do a follow up story. You can read it here.

MMS finally arrives on the iPhone.

(Credit: Corinne Schulze/CNET)

Congratulations, iPhone, you can finally join the cell phone family. AT&T announced Thursday that the long-awaited multimedia messaging would arrive on Apple's device in the United States starting September 25. The iPhone 3GS and iPhone 3G will support the service, but owners of the original iPhone will miss out since that handset lacks the proper radio.

In its brief statement, AT&T offered few reasons why it's taken so long to get such a basic cell phone feature. It only said MMS "required us to work on our network MMS architecture to carry the expected record volumes of MMS traffic and ensure an excellent experience from Day One."

The carrier also said it appreciates the patience of its customers (it better) and that it knows that many iPhone customers are "eager" (that's putting it mildly) for the MMS rollout. Other iPhone carriers around the world have offered MMS since the 3.0 update went live earlier this year.

On the magic day, you'll need a software update before you can send your first photo to another phone number. As we reported last month, some users have seen the MMS commands on their iPhone after the most recent software update, but they've been unable to use them.

And in case anyone is keeping score, September 25 is three days after autumn officially begins on September 22. At Apple's WWDC in June, a company exec said MMS would come later in the summer. And one more thing: we're still waiting for that promised tethering support.

(Credit: Apple)

For at least the third time this month, Apple and AT&T are being sued by a consumer complaining of being duped into believing that multimedia messaging, or MMS, was already available on the iPhone.

Filed in the Northern District of Ohio on Wednesday (PDF hosted by Wired), plaintiff Deborah Carr says Apple and AT&T misled the public into believing that the iPhone 3GS was capable of sending and receiving MMS messages on the device. The lawsuit claims that Apple's "print and video advertisements...on television, the Internet, the radio, newspapers, and direct mailers" all mention the availability of MMS on the device.

Two similar cases--one in Illinois and another in Louisiana--were also filed against the companies in August.

According to the latest lawsuit, first reported by InformationWeek, customers were told that MMS would be enabled on June 17, 2009, when iPhone OS 3.0 was released.

That seems rather strange, considering that Apple and AT&T announced on June 8, during Apple's Worldwide Developers Conference keynote that MMS would not be available until later in the summer. AT&T confirmed that time frame to Wired on Friday.

"We absolutely will offer MMS on iPhone 3GS and iPhone 3G with 3.0 upgrades in late summer, once we complete some system upgrades that will ensure our customers have the best experience with MMS," an AT&T representative said in a statement cited by Wired.

Carr's lawsuit does admit that Apple has a notice on its Web site explaining that support for MMS would be available from AT&T in late summer. However, the suit characterizes the note as a "mouseprint disclaimer," referring to the small print.

Technically, Apple has enabled MMS in iPhone OS 3.0. The proof is that 29 carriers around the world activated MMS on the iPhone when the new operating system was released on June 17. It's not available in the United States because AT&T isn't ready to activate it yet, which was disclosed on June 8.

Updated at 3 p.m. PDT with additional information and background.

AT&T told federal regulators on Friday that it played no part in Apple's decision to keep the Google Voice application from the App Store, while Apple said it never actually rejected the application.

In response to inquiries from the Federal Communications Commission, AT&T's Jim Cicconi, senior executive vice president for external and legislative affairs, told the agency, "Let me state unequivocally: AT&T had no role in any decision by Apple to not accept the Google Voice application for inclusion in the Apple App Store."

Google Voice, which allows users to receive calls placed to a single telephone number in multiple places and make cheap international calls, was deemed unfit for App Store inclusion in July, after it was released for BlackBerry and Android smartphones. Several days after the story broke, the FCC requested that AT&T, Apple, and Google all comment on what led to the exclusion of Google Voice.

Apple, for its part, claimed that the application was never actually rejected. "Contrary to published reports, Apple has not rejected the Google Voice application and continues to study it. The application has not been approved because, as submitted for review, it appears to alter the iPhone's distinctive user experience by replacing the iPhone's core mobile-telephone functionality and Apple user interface with its own user interface for telephone calls, text messaging, and voice mail," Apple said in a statement.

Google also filed a letter in response to the FCC inquiry but redacted a significant portion of that letter when releasing it to the media. A PDF copy can be found here.

Suspicion immediately fell upon AT&T after the Google Voice application did not make it through the approval process, based on the fact that the application lets users bypass hefty rates on international calls. AT&T has also been believed to be behind the delay or rejection of several other applications that could have placed a strain on its network, such as Sling Media's SlingPlayer Mobile application.

But AT&T said it has little influence over the approval process.

"AT&T was not asked about the matter by Apple at any time, nor did we offer any view one way or the other. More broadly, AT&T does not own, operate, or control the Apple App Store, and is not typically consulted regarding the approval or rejection of applications for the App Store, or informed when an application is approved or rejected," Cicconi said in the letter, a PDF copy of which can be found here.

Still, Apple said it's not like AT&T is an innocent bystander.

"There is a provision in Apple's agreement with AT&T that obligates Apple not to include functionality in any Apple phone that enables a customer to use AT&T's cellular network service to originate or terminate a VoIP (voice over Internet Protocol) session without obtaining AT&T's permission. Apple honors this obligation, in addition to respecting AT&T's customer terms of service, which, for example, prohibit an AT&T customer from using AT&T's cellular service to redirect a TV signal to an iPhone. From time to time, AT&T has expressed concerns regarding network efficiency and potential network congestion associated with certain applications, and Apple takes such concerns into consideration," Apple said in its statement.

Skype, perhaps the most well-known VoIP service, seized upon part of AT&T's letter that promised a review of policies regarding VoIP apps running on 3G network as a hopeful sign that Skype would soon be allowed to work on cellular networks.

"We welcome AT&T's willingness to take a fresh look at authorizing VoIP capabilities on the iPhone over AT&T's 3G network," Skype said in a statement e-mailed to reporters. "Skype hopes this is a step forward in enabling consumers to be able to use Skype together with their iPhones and 3G connections and looks forward to hearing more about any potential change to AT&T's policy, in connection with the pending FCC proceeding related to the Skype petition."

As for Google's part, its decision to redact a key portion of its letter to the FCC will raise many eyebrows. The company asked the FCC to redact its part of its answer to the FCC's because "the redaction information relates specifically to private business discussions between Apple and Google and, as such, it constitutes commercial data 'which would customarily be guarded from competitors'...The Internet service industry is highly competitive, and the redacted material relates to business and operations of Google, warranting protection from disclosure under the commission's rules," Google said in a letter to the FCC asking for confidential treatment.