This article is written by Richa Ray, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.

Introduction

The Apple deal with AT&T is considered to be a milestone, details of which is like a mythical beast. Very often some people say that they have seen the agreement but once someone starts to look into it, it vanishes. To understand the deal between the two giants, we must first dig into a little about the history of AT&T and Apple.

History of AT&T

The American Telephone and Telegraph Company (AT&T) was founded by Alexander Graham Bell in 1885. In 1900 The Bell Telephone Company merged AT&T, after which the AT&T became the main phone company in the United States. By 1913, AT&T had the biggest monopoly in the phone market and enjoyed the position for decades thereafter. In 1970, due to litigation, AT&T ultimately broke into seven new independent companies called ‘Baby Bells’. This breakup of AT&T gave way to a new era of competition between Baby Bells, AT&T and new entrants. After many years of additions and changes in AT&T, in 2007 Apple and AT&T came together and signed a 5-year exclusivity agreement.

History of Apple

Apple Computers were incorporated by Steve Jobs and Steve Wozniak on 3rd January 1977. By 1984 because of their hard work and teamwork Apple computers became one of the most famous brands in the computer market. In 1985, Steve Jobs retired from Apple Computers. A power struggle between Steve Jobs and then CEO John Scully had led to his removal from his managerial duties by the Board of Directors.

Apple started facing severe decline in revenues and profits by 1996 and so in 1997 Gel Amelio, then CEO of Apple took the decision to acquire NeXT Inc. (founded by Steve Jobs) which brought back Jobs to Apple Computers as an advisor. Later, Jobs became the interim CEO of Apple Computers.

By 2003 Apple had become a well-known name and had successfully launched iPod. At this point Apple had also seriously started to consider entering the smartphone market which was a very smart move. In 2005, Apple engineers were working on touchscreen technology for a tablet PC and were convinced that they could use the same technology for a smaller device. Apple could see that the iPod business would be negatively affected due to increased competition from the phones so they started working on their next big product and felt that the smartphone market was where the company needed to be, but only on its own terms.

Terms of the strategic alliance

Jobs always referred to telecom operators as “commodities” as they could never understand web and entertainment the way Apple did. Jobs was very sure and serious that if Apple is ever going to release a cellphone handset, the company would do so only on its own terms. Apple was completely trying to change the rules of the cell phone industry and at the same time maintain complete control of the design and marketing of its first cell phone.

Apple decided to create the device and buy excess capacity from the existing carriers to service the device themselves. This was exactly what was done by Virgin Mobile although Virgin did not try to design its own phone. In other words, Apple was looking for a partner that could help fund the development of the iPhone but would grant Apple full control of the development and design but this would need substantial investment and would put Apple in direct competition with the major carriers. 

So, it decided to partner with one of the Carriers and that’s when AT&T and Verizon became the prime targets. Apart from this Apple wanted a partner that would be ready to give it a percentage of the annual service bill for iPhone users and at the same time, Apple didn’t want to provide long term exclusivity to any one carrier. AT&T, automatically, became the prime candidate since it had the largest wireless data network available at that time which reached 270 million people worldwide. On the other side, AT&T was looking for a competitive advantage in the wireless market and to fully transition its brand into that of a wireless company.

Steve Jobs pitched his idea to AT&T wireless Chief Executive Stan Sigman and while the talks with AT&T were still on, Jobs also shopped his idea to other wireless industry giants, including Verizon in the middle of 2005 but Apple’s talks with AT&T accelerated and the wireless titan couldn’t pass up the chance to usher in the smartphone era with Steve Jobs.

Secret negotiations began between Apple and AT&T and ended in a year. Forbes reported, “Trust was a big part of the story behind AT&T deal with Apple.”

As recalled by AT&T CEO Randall Stephenson, he stated: “I told people you weren’t betting on a device, you were betting on Steve Jobs.”

The details of the Apple and AT&T deal was a very secret affair but a number of them were released publicly. Main points of the deal are summarized below:

1. AT&T would be the exclusive carrier of the iPhone for 5 years while Apple would get millions of dollars from AT&T to support the development of the iPhone.
2. AT&T would get 10% of iPhone sales in AT&T stores while Apple would get $10 a month of AT&T iPhone subscriber’s bill.
3. AT&T would get a thin slice of iTunes revenues while Apple would get control of design, manufacturing, marketing.

The entire deal granted unparalleled power to Jobs. He had persuaded AT&T into spending millions of dollars and thousands of hours to create a new feature, a visual voicemail. The AT&T and Apple deal was all about content and because it was all about content, it became very successful. When both the giants joined hands, Apple with its design prowess and AT&T with its network services revolutionized the wireless smartphone industry by making the most user-friendly phone that was iPhone.

Launch of the iPhone with AT&T

On June 27, 2007, the iPhone was launched in North America. There was such an immense excitement surrounding the iPhone that in March 2007 AT&T had over 1million enquiries for the device on its website. According to an AT&T FCC filing in 2011 the mobile data volume on AT&T network surged 8000 percent from 2007 to 2010 which also included data used on iPods and iPads. 

 It was so popular that AT&T itself discovered that its data network demand predictions were too low which caused strains on the network that resulted in spotty coverage and customer service headaches. 

Apple contributed to coverage problems as well since the original iPhone was shipped with glitches in its communication software that led to dropped calls. When a complaint was put up by AT&T to the iPhone about the glitches, it was met with resistance. Apple was not ready to mess up the consumer experience on the iPhone to make AT&T network tenable. Meantime the AT&T customers were constantly complaining about the limited coverage and service on the EDGE network which created numerous PR headaches for AT&T. Therefore AT&T ended up spending $115 billion from 2007 to 2012, acquiring additional spectrum and building its network to meet customer demand.

Impact of the deal on AT&T

AT&T’s central objective behind the partnership with Apple was to attract more subscribers and novelize itself as a wireless company. It was predicted by the Analyst that the iPhone would sell about 8 million units by the end of 2008, but in reality, the number was much larger. The actual sale was 1.4 million units globally in 2007 and from 2008-2011 the number of units sold increased from 11.6 to 72.3 million.

From 2011 Verizon and Sprint also started selling iPhone activations and analysts started speculating that AT&T iPhone activations would drop off quickly once the company lost exclusivity. But in fact, AT&T, in the year 2011 saw 17.5 million iPhones activated.

Impact of the deal on Apple

The value of Apple’s brand and stock skyrocketed after the launch of the iPhone during 2007-2012. According to data Apple’s inter brand ranking went from 39th in 2006 to first in 2013, surpassing all the brand giants such as McDonalds, Coca-cola and Microsoft. Apple’s sales jumped from $19 billion to $156 billion in just six years from 2006 to 2012 and it’s market value skyrocketed from $56 billion to $494 billion during that same period.

Conclusion

The entire credit for such a landmark alliance between AT&T and Apple goes to only one person and that is Steve Jobs. Key points that he believed in were that (i) there are no straight paths to success. (ii) Innovating a product is the first step but without proper marketing of the innovative product, it is bound to fail. He revived the ailing Apple putting it at the forefront of technology and communications. He had a knack of seeing greatness in people and inspiring them to dig deeper and bring out their brilliance in whatever they do.

References

1. Chegg study https://www.chegg.com/homework-help/questions-and-answers/case-t-apple-strategic-alliance-page-c-70-offers-history-t-wireless-history-apple-details–q35743301
2. https://techcrunch.com/2010/05/10/apple-att-iphone-agreement/

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