AT&T needs Apple more than Apple needs AT&T

Ah, if only I could be a fly on the wall listening to the negotiations between AT&T and Apple. AT&T's exclusive agreement to carry Apple's iPhone is due to expire next year, and the Wall Street Journal reported last week that the operator is in talks with Apple to extend the deal through 2011.

Apple certainly has all of the leverage this time around. A new report from Fitch Ratings indicates AT&T increased its market share in the second half of 2008 by 550 basis points to 33.7 percent, thanks mostly to the iPhone. And the operator enjoyed its largest sequential jump in data revenue to $338 million in the fourth quarter.

With the iPhone's proven ability to grow revenues, AT&T has to be searching for ways to sweeten its deal with Apple. Won't many of the iPhone contracts AT&T customers signed in 2008 come up for renewal in 2010? And the biggest complaint among iPhone users has been AT&T's 3G coverage. Interestingly, AT&T CEO Randall Stephenson told the WSJ that with or without the iPhone, AT&T will invest heavily in wireless in an effort to "future-proof" its business, committing two thirds of the operator's capital expenditures in the next five years to mobile network investments and acquisitions.

Moreover, the largest U.S. operator is no doubt knocking on Apple's door. Last week, the WSJ also interviewed Verizon Communications CEO Ivan Seidenberg, who said Apple likely would be willing to work with Verizon on bringing the iPhone to the operator once it launches its Long Term Evolution (LTE) network. He said Apple never seriously considered making a CDMA version of the phone because of the technology's limited global reach as compared with GSM. LTE, on the other hand, is rapidly becoming the 4G choice among the world's major wireless operators.

Certainly garnering an iconic device like an iPhone 4G for its LTE network would be a valuable tool for Verizon as it looks to have the first-mover advantage with its LTE network that will be rolled out in 30 or so markets by next year on a commercial basis. AT&T won't start launching its LTE network until 2011, but I wouldn't be surprised to see the operator making an even earlier commitment if it would prevent the loss of the iPhone and momentum to Verizon. LTE handsets aren't likely to be ready until mid 2011, but if Verizon's rollout plans stay on track, there should be enough scale for an iPhone to gain traction.

One thing is clear today. AT&T needs Apple more than Apple needs AT&T. Last August, it was Apple that extended exclusivity with AT&T until 2010. Now with the iPhone's widely proven success and outside temptations--namely Verizon Wireless--there may be little AT&T can bring to the table that will enable the operator to keep its exclusive grip in the iPhone.--Lynnette

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