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iPhone's success puts AT&T under pressure.

iPhone's success puts AT&T under pressure

Disgruntled iPhone users threatened late last year to overwhelm AT&T's data network by turning on a data-intensive application at a specified time and date and running it for an hour.

So-called 'Operation Chokehold' was a protest against what many believe to be a substandard network. It was called off two days before it was due to take place, when the US federal government objected that it could jeopardise calls to the emergency services.

In the February 2010 issue of Business Week, Farzad reveals that AT&T's problem stems from the exclusive rights its secured to support Apple's iPhone on its wireless network three years ago. Investors at the time hailed the deal as a masterstroke, since it seemed to pave the way for 'stodgy, safe' AT&T to make significant profits from a cutting-edge technology. But AT&T and Apple underestimated the iPhone's appeal.

Part of the problem arose because Apple boss Steve Jobs originally thought that the iPhone would gain around 1% of the global cell-phone market when in fact, it has 14.4%. Many of these users frequently tap into bandwidth-sucking programs like Major League baseball broadcasts or Google Earth. AT&T, which markets the iPhone in the USA, simply cannot handle the traffic.

AT&T has agreed to boost spending on its wireless network by as much as $2 billion this year. The company is also trying to limit the iPhone features customers can use. For example, it prohibits webcasts and file sharing on its unlimited-data plans. But customers complain that unlimited should mean unlimited. A group of them intends to create an online mapping service where users can post AT&T 'dead' zones and poor-service areas for everyone to see. So-called 'flash mobs' are also planned, to picket AT&T wireless stores.

Says Farzad: 'Business schools are littered with case studies of companies that have paid the price for insensitivity to customers' wishes. The perils have only increased in an era when it is easy to make complaints heard globally.'

Apple had to launch the iPhone on to the market before the company could know exactly how consumers would use it. Similarly, Apple is only now learning how people are employing its iPad - a device larger than a phone and smaller than a laptop, which was launched to great acclaim in the spring. Sales of the iPad sailed past the million mark in the USA in the space of 28 days. With demand outstripping supply, Apple had to delay the product's launch in Britain.

Copeland outlines two possibilities for the future of the sleek, user-friendly and relatively affordable product in Volume 161, Issue 4 of Fortune. One is that it could dominate the market for touch-screen tablet computers like the iPod did in the MP3-player market. The other is that it could help to create demand for similar tablet computers produced by other manufacturers, as the iPhone did in the smart-phone market.

'The iPad could lift the entire computing industry - if rivals set up,' Copeland concludes. '[But] without competition, instead of becoming the iPhone of tablets, the iPad could end up as the category's iPod.'