Expect Mayhem at AT&T as iPhone 3G Rolls Out

Largely owing to the sharply reduced price point, we view iPhone 3G as a mass-market device. Added to the lack of “iPhone Classics” available during 2Q, we anticipate extremely robust early demand for the 3G model.

The launch of the iPhone Classic on June 29, 2007, was the most successful product introduction in telecom history. Despite crushing volumes, notably during the first several days of availability, subscribers were able to buy their iPhones and activate them off-site (at home) via iTunes, which interfaced to Synchronoss’ activation platform. We believe that system performed remarkably, with 146,000 activations in 30 hours on June 29 and 30. We do not expect similar success with tomorrow’s expected 3G launch.

In our view, AT&T was recently seeing nearly two-thirds of the iPhones it sold never activating on its network, believing they were activated on foreign networks, especially where iPhones were unavailable. We estimate that this was up sharply from one-third of iPhones during 3Q07, which was a remarkably high level in its own right.

As a result, AT&T needed to change its sales and activation policy to sell its iPhones—likely initially in short supply—to its own subscribers. With a shift toward the traditional U.S. model of subsidized handsets, we believe the importance of turning these devices into AT&T subscriptions is doubly important.

Of the alternatives available to it, AT&T has chosen what we believe is the most ridiculous, inconvenient, and ineffective process to activate the new iPhones. At signup in AT&T stores, subscribers will negotiate the standard retail activation process, slightly expanded given the more complicated features associated with an iPhone. We believe the process will take at least as long as AT&T’s estimate of 10-12 minutes per phone.

With long queues likely for the expected 8 a.m. launch, we hypothesize that many prospective subscribers may become unruly, although we believe AT&T leadership understands and accepts this potential. Apple leadership may not be as cognizant or understanding of this possibility.

We believe the activation process in the Apple stores is similar, with Apple store staff calling into AT&T to activate iPhones. We believe this process is certain to take at least as long as the AT&T store process, and potentially far longer given the Apple staff’s unfamiliarity with phone activations.

In an informal survey of stores through last night, Apple store employees universally claimed not to know what the iPhone sales process entailed. This leads us to believe that there will be limited training for these employees—a curious position given both the number of “test transactions” the companies ran prior to last year’s launch and the unqualified success of that launch.

We believe there are at least two superior choices that AT&T could have made, each resulting in a far-better customer experience. (Of course, AT&T is hardly alone in regards to “customer disservice.") These two basic processes would have either included in-store terminals for activation, or in-home (off-site) activation as in the launch of iPhone Classic.

In one instance, AT&T and Apple would set up several terminals with iTunes, Internet access, and printers to enable subscribers to activate their iPhones online, as with the iPhone Classic. The subscriber would enter the store, pick a model, and check out, paying the unsubsidized price. The subscriber would activate the new iPhone at an in-store terminal, and print out the
confirmation. Upon presenting the confirmation to a “returns desk”, the subscriber would have the subsidy credited back immediately.

The second instance varies only slightly. The subscriber activates the device off-site, with the subsidy credited back either automatically by check or applied as a credit to the subscriber’s account.

In the first instance, we estimate that the check-out process, with obviously more steps, would be perhaps half as long as that currently expected. In the second instance, we believe the check-out process would be as rapid as with the Classic model. In addition to the better throughput—itself a measure of customer experience—the data is likely to be far more accurate than traditional manual activations, given the flow-through process established in partnership with Synchronoss. Even at an expected $6-8 fee per activation, we believe AT&T and Apple would save over $10 per activation due to the more-limited use of staff in the process, and obviating the need to correct mistaken subscriber information, in our view.

Of course, in each case, it is possible that subscribers would pirate the phones offshore again, deciding against activating the new iPhones on AT&T. We view this as relatively unlikely, given the 3G’s higher price point as compared to the Classic. Plus, the iPhone 3G will be available in many more markets at launch, limiting the appeal to subscribers in those markets.

Without a streamlined process such as those we have outlined, we believe there will be troubles in the AT&T stores, and chaos in the Apple stores. Indeed, the situation in the Apple stores immediately following the launch may well cause non-iPhone customers to leave the store, perhaps opting for a more-sedate time to do their Mac (etc.) shopping.

We believe AT&T is likely to stubbornly stick to what we view as its ill-formed activation plan for the near-term, although we imagine that AT&T may return to its prior successful Synchronoss platform in future. More interestingly, we believe Apple may be much more willing to quickly address any Apple store chaos.

A move toward a process as we have outlined as “first instance” could be implemented overnight, in our view. We believe the iPhone interfaces are identical between the 3G and Classic, as it regards activation, obviating any required technical changes in the process. With a flow-through process, we believe the need to add staff in Synchronoss’ call center is minimal and can be scheduled at short notice. Finally, while we believe a new agreement may be required, this time between Synchronoss and Apple, such an agreement is likely to be broadly modeled on the current Synchronoss/AT&T agreement, and settled quickly.

We note that Apple has a far more responsive and customer-engaged culture than any communications service provider, including AT&T. This offers the potential for Apple to strike a deal with Synchronoss to mitigate the likely chaos that will overwhelm their stores tomorrow morning, in our view.