Is AT&T ready for the iPhone 4?

With the launch of the iPhone 4just two weeks away, potential consumers are wondering if AT&T's wireless network is up to the task of handling what is expected to be another record-breaking launch for the latest version of the popular iPhone.

The company says it's ready. But AT&T keeps giving its critics--and its own customers--reasons to doubt that it's on top of its game. On Tuesday, the AT&T and Apple Web sites were overwhelmed by customers trying to pre-order the new iPhone 4. Customers saw error messages when accessing the Web sites and experienced long delays while trying to create or update their AT&T accounts.

Pre-ordering snafus aside, AT&T says that it's been upgrading its network to keep up with demand from current iPhone subscribers and to support a flood of new customers. It has also armed itself with new data plans that cap usage at 2 gigabytes per month to help curb heavy data usage.

In many ways, AT&T has been a victim of its own success. The iPhone, which is built for accessing the Net, has been hugely popular, attracting scores of new customers with each device upgrade. It's helped the company add millions of new customers every year since it was first introduced in 2007. But the iPhone has also created a tsunami of mobile data on the AT&T network, which has resulted in poor service for many iPhone customers throughout the country, especially in densely populated cities, such as New York City and San Francisco.

While no one doubts that AT&T is making good on its promises to upgrade its network and keep up with demand, the fact remains that it's fighting an uphill battle as growth in data usage outpaces its network expansion. In other words, building out its network is more like adding sandbags in a storm rather than constructing a dam. It's more about keeping up than changing the dynamics.

"The success of the iPhone has been a double edged sword for AT&T," said Charles Golvin, a research analyst with Forrester Research. "Because iPhone users consume more data than any other smartphone customers, AT&T has been constantly learning how to manage heavy data usage on a cellular network. "

There's no question that the iPhone is still the hottest smartphone on the market. Tuesday's pre-order meltdown is a good indication that demand is high for the fourth-generation iPhone. And looking at figures from previous iPhone launches, it's expected that sales of the new phone will be strong.

During the first three days it was on sale last year, Apple sold more than 1 million iPhone 3GS smartphones. The original iPhone sold about 270,000 units during its first weekend in June 2007, while the iPhone 3G sold around 1 million when it launched in July 2008.

Of those sales, it looks like AT&T got a significant chunk. AT&T activated more than 2.4 million iPhones during the second quarter of 2009, which ended shortly after the device launched. Roughly, a third of the second quarter activations were for new AT&T subscribers.

The iPhone has become a cash cow for AT&T, and it's helped the company attract millions of new subscribers. But it's also come at a cost. Since the iPhone launched on AT&T's network, it's seen wireless packet data increase more than 18 times. Overall usage on AT&T's network grew 200 percent in 2009 alone. And the company is now servicing more than twice the number of smartphones as its competitors.

The flood of new customers and the increase in data traffic have put strains on AT&T's network, especially in urban areas. During the week in some sections of Manhattan nearly 70 percent of the phones active on AT&T's network are data-intensive devices, John Stankey, chief operating officer for AT&T, said during the company's fourth-quarter conference call.

In an effort to deal with the surge in usage, AT&T increased its capital spending budget to between $18 billion and $19 billion in 2010. It promised to use a portion of the money to upgrade its wireless and backhaul networks to handle the onslaught of new wireless traffic. This is roughly $2 billion more than the company had invested in the previous year.

The upgrades include the addition of 2,000 new cell sites. AT&T has also been adding three times more fiber links to existing cell sites than it had in 2009. This will increase capacity for the backhaul network that connects the cell towers to AT&T's main network. The backhaul portion of the network is a critical component to AT&T's network.

Last year, the company nearly completed its efforts to put more 3G traffic onto 850MHz spectrum, which will improve coverage and the quality of the network. It also completed the upgrade to HSPA 7.2, which as the name suggests has a theoretical download speed of 7.2 Mbps.

Later in 2010, AT&T is planning to upgrade the 3G HSPA network again. This time it will be upgrading to HSPA+, a standard that offers theoretical download speeds of 21 Mbps with actual download speeds averaging about a third of that figure. Eventually, AT&T will upgrade to a 4G technology called Long Term Evolution, or LTE. It will begin testing the technology later in 2010 with initial commercial deployments starting in 2011.

Unfortunately, for current iPhone users and those upgrading to the iPhone 4, the upgrades to HSPA+ and 4G LTE will not affect iPhone performance since these phones do not have these technologies embedded. That said, the HSPA 7.2 upgrade, 850MHz conversion, and addition of fiber links in the backhaul network will help alleviate some network congestion.

Analysts agree that AT&T is moving in the right direction with its upgrades. The only question is whether it is moving quickly enough.

"They are continuing to invest in backhaul and trying to migrate their infrastructure to HSPA+, which should give them faster network speeds and more network capacity," said Ross Rubin, an analyst with NPD Group. "But as Apple adds new capabilities to the iPhone, which attract new applications, it opens the door for greater data use."

The new iPhone 4 offers better screen resolution, a higher megapixel camera that records in high definition, a gyroscope, and faster microprocessors. These enhancements by themselves will not chew up more bandwidth than the existing iPhone 3GS, but the applications that will likely get developed using these new features could.

To help keep data usage in check, AT&T has adopted a new pricing plan. Earlier this month, it eliminated the unlimited data plan for new subscribers. Instead, new iPhone users will subscribe to one of two data plans. For $15 a month, users get 200MB of data. And for $25 a month, they will get 2GB of data. AT&T claims roughly 97 percent of subscribers use less than 2GB of data every month. But most experts agree that data caps of any kind will likely alter customer usage patterns. And it will likely help keep data intensive apps like streaming video and audio on Wi-Fi networks instead of AT&T's 3G network.

In fact, the new FaceTime video conferencing app that will use the iPhone 4 front-facing camera will only be used on a Wi-Fi network. And AT&T expects most Netflix viewing on the new iPhone 4, as well as the iPad, will be done on Wi-Fi.

"The benefit of the usage caps is that it will likely drive a lot of the heavy data usage for new applications to Wi-Fi," Golvin said.

Some analysts believe that improvements in the design of the new iPhone 4 will also improve performance and might even help prevent dropped calls. First the company has added a faster, home-grown processor called the A4 chip--the same one found inside the iPad--that should allow users to access apps and the browser quicker. Apple has also made some hardware changes to improve reception. Steve Jobs explained at WWDC last week that three different seams in the metal band running around the edge of the iPhone 4 are part of a new antenna system. According to Apple, that should help with some of the reception problems customers have experienced.

Even with network upgrades and newly designed hardware, iPhone users could still face a congested network. Meanwhile, AT&T's rivals are not sitting idle. Sprint Nextel, the first national carrier to offer a 4G wireless service with broadband speeds for wireless devices, has just launched the new Google Android based HTC Evo.

Verizon Wireless is building its 4G network and expects to launch the network commercially in 2010 with more markets coming online in 2011. And then there is T-Mobile USA, the smallest of the major wireless providers. It is currently upgrading its 3G network to HSPA+. It already has several markets turned up and will announce on Wednesday that it is adding an additional 25 markets.

These challengers claim they are ahead of AT&T in terms of network speeds and capacity. But the reality is that few devices are even on the market that can take advantage of these network upgrades. For example, Sprint is the only company with 4G wireless handset, the HTC Evo. A Verizon 4G phone isn't expected on the market until at least the middle of 2011. And T-Mobile USA is currently only offering data sticks for its HSPA+ service.

What's more these operators service far fewer 3G smartphone customers than AT&T. For a comparison, look at T-Mobile versus AT&T. Today, T-Mobile has 5.2 million customers using 3G-capable converged devices on its network, which is an increase of 33 percent from 3.9 million customers in the fourth quarter of 2009. By contrast, AT&T has 15 million iPhone customers alone. This doesn't even include the millions of other smartphone and converged-devices AT&T has using its network.

"AT&T has been at the forefront of learning how wireless carriers deal with heavy data usage," Golvin said. "They are really the pioneers. And if any other carrier had the kinds of traffic loads that AT&T has had to deal with as a result of the iPhone, then they would have the same problems. And for anyone to claim any different is crap."

Still, many wireless consumers say the fear of poor AT&T network performance is keeping them from switching carriers for the latest iPhone. Joe Lopez falls into that camp. He had hoped that Apple would announce a new version of the phone for Verizon. When no such announcement came, he decided to settle for an iPhone competitor.

"I am currently a Verizon customer on a month-to-month (contract) waiting to see if they get the iPhone contract," he said. "AT&T doesn't make it attractive to switch. So after waiting long enough, I will now get the Droid Incredible."

CNET's Erica Ogg contributed to this report.