Why You Should Thank AT&T (Yes, It’s True)

People love to trash AT&T (NYSE: T). Talk to any iPhone user and they’ll complain of dropped calls, voicemails gone missing, and other problems that seem inexcusable in a time when many people don’t have a home phone.

But believe it or not, for all its well-documented network and service problems, AT&T actually deserves a debt of gratitude from mobile phone users, and not just its own subscribers. It has completely changed the way the wireless industry does business in the U.S. Without AT&T and Apple (NSDQ: AAPL), we would still be using our Razr and downloading ringtones and StarTrek wallpaper. Well, that’s a little bit of an oversimplification, but here’s what I’m talking about…

If you can remember back more than two years ago, Apple was asking for a lot. It wanted a partner that would not only subsidize an expensive piece of hardware, but that would hand over complete control of the device. In those days, that was unheard of. The carrier owned and dominated the experience. If you wanted to sell mobile games or ringtones, you did it through the carrier, and after each sale, you gave a sizable chunk of the revenues back to the carrier. Carriers operated what we all called “walled gardens,” where all content not being sourced by the carrier was cut off to the consumer. To put that into today’s terms, that frequently meant NO internet access and limited choices.

The iPhone changed all that, and today all consumers are benefiting, not just AT&T subscribers. Maybe if AT&T didn’t agree to work with Apple, another carrier would have. But so much has changed over the past two years since the first iPhone—and much of it has to do with AT&T giving up control over the user experience. This may be little solace to an AT&T customer who just had to hit redial for the third time because the network failed them, but it’s worth remembering.

Why is the network so overwhelmed? Because no one, likely including AT&T, knew back then how phenomenally successful the iPhone would be. Turns out if you made it easy enough, consumers were eager to surf the web and download applications on the go. And now AT&T is paying the cost of being cutting edge. While AT&T has banned some iPhone applications, it has let almost everything go through. (Ironically, Apple is the one you have to get past). After all these years of carriers being cautious, only now we are getting a taste for why they were so reluctant to open up. Each carrier has only so much capacity, and the iPhone is pushing AT&T to the outer limit.

Today, in AT&T’s second-quarter earnings call, the carrier said traffic generated by the 9 million iPhone users on its network is overwhelming. AT&T’s CFO Rick Lindner: “Our network handles more data traffic from integrated devices than all of our competitors.” AT&T knows it has a problem. This summer, it will start upgrading its network to HSPA (short for high-speed packet access), which will improve the device’s speed and increase capacity. While it is what a carrier would call a “simple” software upgrade, completion won’t be done until 2011.

Yesterday, Apple’s COO Tim Cook defended the company’s partnership with AT&T during its call. He said Apple’s relationship with AT&T is “excellent” and “we are very happy with it.” While it may not be peachy all of the time, you have to believe him. After all, it was AT&T that took a chance on Apple and even now is helping the company to sell more phones than it can manufacture. In the second quarter, AT&T sold 2.4 million iPhones, or nearly half of the 5.2 million Apple sold in total.

So beat up on AT&T all you want, it probably isn’t fair that you are spending $100 a month for lousy service. But remember that you might not have all the advanced web-surfing capabilities and popular apps—to the extent we do today—if AT&T hadn’t plunged into the brave new world of the internet.

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