Apple, AT&T: Bosom buddies or odd couple?In another move that could heighten competition between the two companies, Apple announced last week that it was allowing iTunes users the ability to transform songs they purchase or already own into ringtones for an additional US$0.99. AT&T, along with other cell phone operators, generates a significant portion of its data revenue from the sale of ringtones. In 2006, US operators generated about US$873 million in revenue from ringtones, according to Jupiter Research.
"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."
Apple also announced several new models of its iPod music player, including the new iPod Touch, which is essentially an iPhone without the AT&T voice and data service. This means that iPod enthusiasts who love the button-less design and sleek iPhone interface can get most of the features they love on the iPhone without spending US$60 a month on the AT&T voice and data service.
--Michael Goodman, director of digital entertainment, Yankee Group In one respect, the iPod Touch itself doesn't compete directly with the iPhone. It doesn't offer a cellular voice and data service that allows nearly ubiquitous wireless coverage over AT&T's 2.5G EDGE network. And it doesn't offer the ability to add a voice over IP client, such as Skype, so the device couldn't be turned into a phone. "The iPod Touch and the iPhone share some innovative features," said Natalie Kerris, a spokeswoman for Apple. "But one is a phone and one is not. So I would disagree with an interpretation that these products compete." That said, the iPod Touch, like the iPhone, does offer Wi-Fi connectivity, which is many times faster than AT&T's regular network. And with 50,000 Wi-Fi hotspots in the US and 170,000 hotspots worldwide, it offers consumers who may not need continuous Web access an alternative to the iPhone and AT&T's data package. Because it doesn't require a service contract, the iPod Touch could be especially appealing to people who already have cell phone plans with other carriers in the US. As a result, the iPod Touch could weaken the strategic appeal of the deal with AT&T, which has been banking on iPhone exclusivity to drive new subscriber growth. "The best that AT&T could hope for from this deal with Apple is adding new subscribers," Yankee Group's Goodman said. "And my gut feeling is the iPod Touch will have a negative impact on iPhone sales at least in the US." Mark Siegel, a spokesman for AT&T, said the company, which together with Apple has sold more than 1 million iPhones since the launch in June, doesn't expect the iPod Touch to impact iPhone sales. He said AT&T is well aware of Apple's product road map and has found the company to be a cooperative partner. "We aren't concerned about (the iPod Touch) at all," he said. "Apple is a very good partner. The longer we work with them, the more that is confirmed." That said, Apple doesn't have a strong track record when it comes to partnerships. For example, the company has had a contentious relationship with the music industry in the last couple of years. At first Apple was viewed as a trailblazer for digital entertainment. But two years after the company launched its iTunes music store, music executives were grumbling that Apple had too much power over pricing and digital rights management. Instead of selling songs for US$0.99 a pop, record label executives wanted to be able to charge higher prices for more popular songs. And Apple's refusal to license its antipiracy technology, called FairPlay, to rival MP3 player makers, also angered music industry execs, as they viewed Apple as fragmenting the marketing and limiting distribution. Earlier this year, Steve Jobs, Apple's CEO, urged major music labels to ditch copying restrictions from music sold online. In April, Apple announced that EMI Music would make its entire digital catalog of music available for purchase DRM-free. Then, of course, there was the failed partnership with cell phone maker Motorola. The two companies announced in July 2004 that Motorola would create a new mobile phone loaded with Apple's iTunes software. But when the device, called the ROKR, was introduced in 2005, it was panned by critics who found the traditional cell phone interface and design disappointing. What's more, the device's memory was limited to storing only 100 songs. "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."
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