September 13, 2007 4:00 AM PDT

Apple, AT&T: Bosom buddies or odd couple?

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AT&T is straddling a precarious line between partnering and competing with Apple in the mobile music market.

AT&T's exclusive deal to sell Apple's iPhone for use on its network in the United States has been the envy of the wireless industry for more than nine months. But managing its own mobile music strategy while working with a tight-lipped and controlling partner like Apple is proving a challenge for AT&T, particularly as Apple launches new products and services that may compete with AT&T's own.

Like many partnerships in the tech industry, the Apple-AT&T combination is increasingly looking like "co-opetition," a term used to describe business partners that also compete. Apple, of course, is no stranger to co-opetition: For years, Microsoft, to name one company Apple works with, has sold software to run on the Macintosh operating system despite its own, more dominant Windows OS. Now AT&T is learning that the blurring of self-interest and cooperation is the price of doing business with a fast-moving outfit like Apple.

"With this deal, AT&T thought like a traditional phone company, focusing mostly on driving subscriber growth," said Michael Goodman, director of digital entertainment for market research firm Yankee Group. "But the partnership with Apple won't make AT&T a successful provider of digital entertainment."

"With the iPhone, Apple decides what products and services to load on the device. It's a completely different business model."
--Mark Collins, vice president of consumer data services, AT&T

AT&T is no stranger to mobile music. The wireless company, which until the merger of AT&T and BellSouth was known as Cingular Wireless, introduced its first music-capable phone, the Nokia 3300, in July 2003. Two years later, it introduced the Motorola Rokr, the first iTunes-enabled cell phone. But the phone (which was panned by critics for its 100-song capacity and was upstaged by the simultaneous unveiling of Apple's iPod Nano) is considered a flop.

Motorola stopped including the iTunes software on new versions of the Rokr. Instead, the company replaced it with a media player built by Motorola that is compatible with Windows Media Player formats. Most big online music stores, such as Napster, handle music in this format.

In late 2006, AT&T launched its own branded music service. Competitors Verizon Wireless and Sprint Nextel had established their own music stores more than a year earlier. But unlike these competitors, AT&T partnered with existing music service providers--Napster, Yahoo and eMusic--to bring together a collection of music that would be branded as the AT&T music store on its mobile phones.

Initially, the music service only allowed users to download songs to music-enabled phones via their PCs. But this summer, the company announced a deal with eMusic to make its 2.7 million song library available for purchase and download over AT&T's 3G wireless network.

Apple by far outpaces sales of all three major cell phone operators who sell music to mobile subscribers. In fact, all three carriers--AT&T, Sprint Nextel and Verizon Wireless--sold as much music for all of 2006 as Apple sells on average in three or four weeks, according to Yankee Group's Goodman.

Around the same time as the eMusic deal, AT&T launched its partnership with Apple, the leader in the portable music market with its popular iTunes music store and iPod music-playing devices. Under the contract, AT&T is the only carrier in the United States to provide cell phone service to the iPhone.

But unlike other phones sold by AT&T, the iPhone is largely controlled by Apple. And while it supports Apple's own iTunes software, it does not work with AT&T's own music store.

A 'unique' relationship
This fact alone sets up some competitive tension between the two companies, each of which is hoping to generate as much revenue as possible from its own service. But even though AT&T gets no revenue from iTunes sales to iPhones, the company says it doesn't view Apple's music store as competition.

"One of the things we've demonstrated is that we can offer multiple sets of choices to our customers," said Mark Collins, vice president of consumer data services for AT&T's wireless unit. "AT&T is a market leader in wireless and Apple is the market leader in online and portable music. So it was a natural fit for AT&T and Apple to make a product available to our customers."

Still, Collins admitted that the relationship with Apple is "unique."

"With other handsets, we decide the applications that are used and how to define the service offering," he said. "But with the iPhone, Apple decides what products and services to load on the device. It's a completely different business model."

The competitive waters have been muddied even further with a couple of recent Apple product announcements. First, Apple announced that it had Wi-Fi-enabled its iTunes software, which to some looks like an assault on AT&T's new over-the-air music downloading service from eMusic. Just like with eMusic, iPhone users will be able to purchase and download music wirelessly directly to their phones.

Apple did not make this functionality available via AT&T's cellular network even though the iPhone is Wi-Fi-enabled, but instead struck a deal with Starbucks and its Wi-Fi hotspot provider T-Mobile USA that allows any Wi-Fi-enabled device running iTunes to automatically recognize the wireless music store without a connection fee.

Collins wouldn't comment on whether iTunes music downloads would eventually be available via AT&T's cellular network, but he did point out that AT&T itself waited until it had a sufficient 3G network footprint before it offered the service via eMusic. Currently, the iPhone operates over AT&T's 2.5G EDGE network. Collins said the music-downloading experience is markedly better over a faster 3G network.

See more CNET content tagged:
AT&T Corp., EMusic, Motorola ROKR, Apple Computer, Verizon Wireless

29 comments

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Last line of piece
"I haven't seen a deal yet where Apple hasn't come out of it
smelling like roses and its partners have had to bear the brunt."

Umm ... I'd say Apple wound up on the short end of the stick
when it partnered with Microsoft on software development lo
those many years ago. Microsoft wound up stealing its OS and
taking over the world. Apple came within a hair's breath of going
under.

A little sense of history might have tempered that particular
comment.
Posted by calpundit (69 comments )
Reply Link Flag
We have to look at the bottom line.
Not just monetarily, but intrinsic worth. And we have to talk
about that. ... Not just the surface of squabbles, nor the leagal
bull lort that people throw around, but what the two companies
do for us.

Whose future is more important to us?

NBC, and their ilk, that make entertaining wastes of time. Not
only do they want to charge you to see it, they want to rent it to
you for the rest of your life, where you pay by month, forever?

Or. ...

Apple, and their ilk, that create real products, real tools. Things
we can use to make money, create things of our own?

I think people should know what the stakes in setting up a battle
are. ...

And, I think c/net, and their ilk, need to come down on the side
of people. Come down on our side, and really show what the
differing sides mean to our future.
Posted by iJak (2 comments )
Reply Link Flag
The feel-good company
AT&T is just too touchy-feely for this relationship to last. When you
think AT&T, you think happy face.
Posted by nicmart (1829 comments )
Reply Link Flag
Are You Kidding?
Whenever I think of AT&T, I think of Evil Empire. Don't forget,
AT&T is really Cingular (pure evil). It is because of iPhone being
chained to Cingular (now AT&T), I would never touch it no matter
how wonderful it might be.
Posted by thomasdosborneii (19 comments )
Link Flag
Here's one
"The bottom line is that Apple is not a good partner," said
Yankee Group's Goodman. "They have tremendous products and
marketing. But if you're a partner, you'd better put your hand on
your wallet. I haven't seen a deal yet where Apple hasn't come
out of it smelling like roses and its partners have had to bear the
brunt."

How about the Microsoft-Apple partnership in '98 through '03?
Microsoft invested $150M in Apple and guaranteed Microsoft
Office development on Mac for 5 years. Apple in turn dropped a
lawsuit against MS for copy-write infringement for Windows and
some of the code in Win Media Player. Apple was helped out at a
time they needed it, and Microsoft made a huge profit from their
$150M stock and every copy of MS Office they sold. From what I
hear Microsoft came out on the better end on $1B in that deal.
Sounds like a good partnership deal to me.
Posted by escaport (19 comments )
Reply Link Flag
The real winner
Microsoft was inarguably the short-term winner, but the bottom
line is that, with the gurantee of Office availability and a cash
infusion, it allowed Apple the breathing room to enact a long-
term plan whose fruits it is harvesting today. A strategic
retrenchment. In the longer term, which company would you
rather be: Microsoft, whose Windows/Office cash cows are
looking more every day like the golden cage -- like the original
AT&T's long-distance business -- or Apple, which has
succeeded at diversifying into new businesses it has helped
create?
Posted by cincytee (40 comments )
Link Flag
Partner
To be short. Gates worked at Apple early on and stole everything
he could get his hand on and started Windows. Not a very nice
thing to do, but business is business right? Gates was so
successful that Windows became so dominant that when Apple
was almost out of business Gates bailed them out with the 150
million to assure Apple stayed in business so that Microsoft
wouldn't be considered a monopoly. Gates didn't give money to
Apple because he was a nice guy and wanted to help out his
competition. He just needed to competition to stay in business.
Posted by Nodack (198 comments )
Link Flag
Envy of the Wireless Industry?
"AT&T's exclusive deal to sell Apple's iPhone for use on its network in the United States has been the envy of the wireless industry for more than nine months."

Didn't the author read all the reports of EVERY OTHER cell phone company turning down Apple because they wanted too much control over their product. After AT&T accepting the deal with Apple, the other major carriers in the US are more likely to feel pity for ATT, not envy. AT&T has to pay Apple a piece of every iPhone's monthly service. You don't see Motorola, Palm, HTC, Samsung, or any other phone maker demanding a kick back from the monthly service do you? That, along with other reasons, is why all other carriers denied to host the Apple iPhone.
Posted by mvpcarl (31 comments )
Reply Link Flag
so what's your point?
Are you saying AT&T made a mistake? I don't think so!
Posted by oxtail01 (308 comments )
Link Flag
You are right
Yeah, I laughed at the "envy" line!
Posted by thomasdosborneii (19 comments )
Link Flag
AT&T/BellSouth
I heard that the deal was cut between BellSouth (Cingular Wireless)
and Apple and that AT&T had to go along with the deal in the
acquisition of BellSouth. I bet if Apple had to deal with AT&T back
then we would not have the freedom on the iPhone that exists
now for bluetooth, file transfer, etc.
Posted by georgiarat (254 comments )
Reply Link Flag
AT&T/BellSouth
Don't be confused by the AT&T name. Bell South bought what
was left of AT&T and took its name because of its worldwide
recognition. AT&T had to go along with the deal because it *is*
Bell South,
Posted by cincytee (40 comments )
Link Flag
AT&T the Big winner and also the BIGGER loser here
a MILLION phones (some currenent but many if not mostly new customers) in only 74 days!

WOW!

What cellular provider (CEO) wouldn't voluntarily have it's eye teeth pulled for such a massive influx of
users?
No single phone has ever reached such a large market in so short a time.

Here's the kicker though . . .
Even though the majority of reviews on the iPhone have been favorable (gleeming) with only a few "poo
poo's" from people who rely on uncompatable MS products (whose fault is that?) on their "smart" phones
. . .

The VAST majority of bad press on the iPhone has focused on AT&T . . .
Unable to activate when they purchased the phone . . .
Screwed up billing practices . . .
Did I see story about a $3000 phone bill for someone who took their phone to Europe with them . . .
roaming charges for auto email checks?

Look at the story line:
Apple, AT&T: Bosom buddies or odd couple?

When the iPhone was released everytime I saw an iPhone related story on c/net I also saw . . .
right over there > > >

And ad for the new "AT&T Blackberry"
How f**king stupid is that?
Try to piggyback on iTunes success?
Nope . . . try to launch a competing music store that can't be played on the iPhone that they EXCLUSIVELY
sell!
(Can't be played because MS stopped supporting Mac OS "WMP/WMA" about 3 or 4 years ago)

I think AT&T is gonna take the bullet on this one . . .
Not because Apple screwed them but because they screwed themselves
Posted by K.P.C. (227 comments )
Reply Link Flag
bullshit article
AT&T knows better than wasting their time and effort chasing a business segment that's NOT in their main focus. AT&T is doing fine in spite of all your idiotic ranting and cussing and will continue to do so.
Posted by oxtail01 (308 comments )
Link Flag
If the phone companies where doing it right...
They would be in the number 3 spot like Apple is with their itunes
store. I've had 4 different music phones and the experience is
terrible. Even today nothing comes close to the Iphone experience,
nothing. Try putting an MP3 onto a N75 or SYNC and then scrolling
through songs and shuffling songs and changing equalizers and
looking at album art. For 2X the price Verizon nor ATTs product is
even close when it comes to music.
Posted by MRMOAV (29 comments )
Reply Link Flag
Stop Lying! Nokia 300 Not first music phone
I owned the first MP3 music phone back in 2000. It came from Sprint and Samsung and was called the Uproar.

<a class="jive-link-external" href="http://www.amazon.com/Samsung-SPHM100-Uproar-Phone-Sprint/dp/B00004YKVU" target="_newWindow">http://www.amazon.com/Samsung-SPHM100-Uproar-Phone-Sprint/dp/B00004YKVU</a>

It held about 20 songs and was awesome for its time. You could be listening to music and when a call came in itlet you answer it.

I am sick of people forgetting that this phone ever existed.
Posted by jhawk95 (38 comments )
Reply Link Flag
Cingular's First!
It doesn't say THE first music phone.
Posted by nmcphers (261 comments )
Link Flag
No odder than ...
I don't think they more odd than Microsoft &#38; IBM or Bosom Buddies like IBM &#38; Microsoft. ;)
Posted by cyberspittle (165 comments )
Reply Link Flag
iPod touch not competition
Personally I would never buy an iPhone. I'm not interested in the convergence of a music player and phone and I'd rather use WiFi for internet. So, when the iPod touch was announced I found a device I was interested in and ordered one. So, in my case, there was no competition. I would suspect the same reaction from many other people.
Posted by herkamur (115 comments )
Reply Link Flag
iPhone is WiFi too... duh!
So you didn't like the iPhone because you like WiFi.... but the iPhone was the first Apple device to let you browse the internet using WiFi..... so I don't get your point.

Why carry an extra phone when the iPhone can do it all... it does EVERYTHING the iPod Touch does and more.....
Posted by jhawk95 (38 comments )
Link Flag
Waa?
I agree, why would anybody be interested in one small device that
does everything when you can buy several different devices and
carry them all around with you.

If you prefer WiFi you could always turn on that feature in the
iPhone since it does come with it built in. It even looks for WiFi
when you come in range of one and asks you if you want to join.

Silly hekamur
Posted by Nodack (198 comments )
Link Flag
Apple/AT&T deal was shortsided
Apple made a huge mistake making the deal with AT&#38;T. Remember
when the iPod was Mac only? How many did they sell? By limiting
consumers to which platform their toy played, Apple almost missed
the iPod taking off at all. In just months there was a Windows
compatible iPod and the rest is history. Consumers are stating very
clearly they want the iPhone in the network of their choice. Apple
obviously didn't learned a thing from the iPod launch.
Posted by PostNoComments (116 comments )
Reply Link Flag
iPhone is cool
I bought mine from <a class="jive-link-external" href="http://www.iphone-singapore.com/" target="_newWindow">http://www.iphone-singapore.com/</a> and so far, it's attracting so much attention from people. People so far away are looking at what I'm carrying, absolutely awesome.
Posted by AlienEric (42 comments )
Reply Link Flag
 

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