Why AT&T Wants Customers to Buy the iPhone 4

Updated As the time for Apple's next generation iPhone 4 to be unveiled at the company's WWDC event approached, something curious began to happen. AT&T started moving up existing customers’ eligibility to upgrade by six months or more so that even many of those who bought the iPhone 3GS last year under a carrier subsidy can upgrade again this year. What’s going on?

Carriers generally do not like offering early upgrades on devices because they heavily subsidize the price of most phones they sell (notably excepting the original iPhone in 2007). Carriers do this in exchange for customers signing two-year contracts, guaranteeing that the subsidy will be earned back over time. Last year, AT&T caught flack when iPhone 3G customers who did not seem to understand this principle became angry they could not upgrade to an iPhone 3GS for a subsidized price.

While Jobs noted during the iPhone 4 unveiling that upgrade dates could be pushed up as much as six months due to “generosity” on AT&T's part, we have confirmed in some cases AT&T is going even further, allowing those not due to receive upgrades until eight or more months from now to upgrade.

Has AT&T suddenly decided that keeping its customers current with the latest and greatest is more important than its bottom line? Somehow, I doubt it.

This policy change at Ma Bell is almost certainly a response to the threat of a Verizon iPhone. A threat the iPhone’s current carrier must believe is all but certain and imminent.

I am all but assured by those in the know that the iPhone HD will not be available for Verizon in the next few months, meaning this will be another AT&T exclusive launch. On the other hand, I believe that AT&T is moving up eligibility for its users who otherwise would come up for new contracts next year because a Verizon launch will occur before the next iPhone release in 2011.

A Verizon launch early this autumn seems likely and AT&T wants to get people tied into a long-term commitment before rumors around Big Red's upcoming iPhone begin to appear too genuine.

What does extending customers out two years do for AT&T? Though AT&T has been making significant improvements to its network over the last year to stem the tide of complaints about call reception and quality, the beating it took in the press over the first few years of the iPhone will not wear off quickly. Two years buys the teleco time to finish its next-generation LTE build out and show off what it can do.

While LTE is the designated 4G upgrade from AT&T's present GSM/UTMS network, and not Verizon's CDMA2000 one, Verizon is still way ahead on deploying LTE as it joins most of the rest of the world in following the 3GPP’s family of cellular technologies. AT&T has more flexibility in offering increasingly fast speeds over its 3G network than Verizon or Sprint do and thus has been less anxious to make the 4G jump too quickly.

Yet, LTE will win if only by a marketing fiat.

Don't misunderstand me — LTE is better than AT&T's HSPA network over the long term, but AT&T is right from a technical standpoint not to rush into LTE. Since the maximum abilities of AT&T’s network exceed the minimum abilities of 4G technologies like LTE and WiMax, even 2009’s iPhone 3GS can offer real world performance that is better than the reported speeds of Sprint's HTC Evo 4G, once AT&T completes its current batch of upgrades later this year.

But, consumer perception is that 4G is automatically better than 3G. The fact that Sprint is already promoting 4G and Verizon soon will be is causing the general perception of AT&T to bend to the narrative of AT&T’s network woes of years past: AT&T is behind again.

It may not be entirely true or fair, but such a perception hurts the company anyway. Add in the iPhone showing up at Verizon or even both of AT&T’s 4G promoting rivals over the coming months, and AT&T could face a situation where a lot of customers decide not to re-up with the company.

Hence, AT&T needs to get as many enthusiasts locked in as possible while it awaits its own LTE network lest the inevitable loss of iPhone exclusivity on the horizon cause it to hemorrhage its most lucrative customers. Tying customers to another two-year contract is worth the price of subsidizing two expensive phones in less than two years for AT&T in its present situation.

Assuming it gets its LTE network lit up and running smoothly by the time those contracts expire, it knows it can be in a much better place come 2012 than it is in 2010, even if the iPhone is no longer its exclusive product then.

Timothy R. Butler is Editor-in-Chief of Open for Business. Full disclosure: Tim owns a small quantity of Apple (AAPL) stock.