It seems a day doesn’t go by without news of some fresh controversy breaking about the iPhone. The latest brouhaha concerns Verizon’s new ads targeting AT&T’s inferior 3G coverage.

Verizon is attempting to use the constant barrage of complaints from iPhone customers about AT&T’s network to its advantage. AT&T has sued Verizon in hopes of getting the ads altered or pulled. (Side note: it’s interesting that just a couple of years ago, Alltel was presenting itself as an alternative to the four largest carriers, and now the two largest don’t seem even to be paying attention to the others. FCC, are you seeing this?).

As others have noted, perhaps AT&T’s time would be better spent catching up in 3G coverage. Its network has been the butt of jokes for years. iPhone users seem to love their new wireless devices, but hate the network they’re forced to use – a conflict that Verizon is using to its advantage.

In a recent filing to the FCC, several public interest groups offered a detailed account of what iPhone customers have endured with their AT&T service (see pp.17-25 of our filing).

Well before its launch, AT&T acknowledged the iPhone would result in much greater network usage. Here's a brief history of AT&T's awful iPhone history:

Immediate network capacity issues

• The iPhone received unprecedented hype prior to its launch, making it clear that the device would bring in many more AT&T smartphone subscribers.
• AT&T placed original iPhone customers on its 2G network, promising that “capacity won’t be an issue.”
• Reviews found the network “excruciatingly slow,” perhaps because AT&T first deployed the technology in 2003.
• The iPhone 3G was introduced one year later, by which time you’d expect AT&T to have adequately built up its network. AT&T’s massive advertising campaign publicized the new phone’s ability to browse the Web much more quickly. The new device also allowed for third-party Web applications, the ads claimed.

Customer backlash

• The hype, however, turned out to be just that. Complaints immediately exploded online over slow data speeds, dropped calls and long-delayed text and voicemail messages.

• Apple released software updates that subsequently alleviated certain device-related problems.
• Nonetheless, complaints about AT&T’s network continued to pour in.

Anticipated problems

• AT&T says it knew that a large increase in network traffic was going to occur with the rollout of the latest iPhone. The company clearly had concerns about its ability to handle the new iPhone subscribers on its recently upgraded 3G network, despite what the advertisements may have been telling consumers.
• The iPhone’s ability to support third-party apps was a particular point of concern for AT&T. In its letter to the FCC about Google Voice, AT&T stated that its prior discussions with Apple addressed the “potential congestion” that might result from the music applications proposed by Pandora and AOL. Well, it turns out these apps weren’t even in the approval pipeline months after iPhone 3G subscribers had signed up en masse and created some unpredictable rise in traffic. In fact, the AOL Music application was still the early version sent to reporters prior to the device’s official launch. Pandora released its application the day the iPhone 3G went on sale.

Massive profits

• Of course, this lack of preparation, investment and capacity didn’t stop AT&T from signing up 3G iPhone customers in record numbers. In fact, AT&T averaged more than double the iPhone subscribers added during the initial iPhone sales in every quarter since the iPhone 3G came out (see p. 18). And rest assured, customers were doing their part, paying nearly $100 per month.
• With AT&T raking in nearly $100 per month per customer for two years, where was all this money going if not back into the network AT&T was so concerned about? Primarily, three places: First, to Apple. AT&T pays Apple up front for the device, while selling a subsidized device to consumers. The other two beneficiaries of hefty subscriber fees were: AT&T shareholders, in the form of dividends, and … AT&T’s bank account. In 2008, AT&T “paid a total of $9.5 billion in dividends to stockholders,” and had free cash flow (read: just spare cash, kinda like the change holder in your car) of $13.3 billion. No fooling.
• The company’s ability to adequately serve customers must have been further compromised by the explosion in sales of 3G laptop cards during this time period. These customers couldn’t have known at the time just what they were getting themselves into.

These are not some fancy upgrades we are talking about -- just basic maintenance to ensure a network can meet customer expectations and advertising promises. Let’s remember, the iPhone has been out for almost two years, yet the onslaught of complaints about AT&T’s network continues unabated. Of course, this also reflects poorly on Apple. The company was reportedly “dumbstruck” after finding out that AT&T only intended to pay lip service to network speed and reliability.

AT&T’s behavior shows a clear pattern: Sign up as many iPhone customers as possible and worry about their experience later, to the extent that AT&T worried about it at all.

What should happen now? AT&T needs to fix the problems, and if it can’t, it should stop signing up new customers and making current customers pay $100 per month until it can provide a network that is true to its advertised capabilities. In my next post, I’ll discuss how AT&T took things to a whole new level with the new iPhone 3G S (Hint: the “S” is for speed, HA).