Locked up: Why AT&T racks up so many exclusive phones
CNET takes a look at how AT&T is able to strike so many agreements, including past notable exclusives, and explains why they make business sense even as they irk consumers.
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Roger Cheng (he/him/his) was the executive editor in charge of CNET News, managing everything from daily breaking news to in-depth investigative packages. Prior to this, he was on the telecommunications beat and wrote for Dow Jones Newswires and The Wall Street Journal for nearly a decade and got his start writing and laying out pages at a local paper in Southern California. He's a devoted Trojan alum and thinks sleep is the perfect -- if unattainable -- hobby for a parent.
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AT&T and Nokia have long enjoyed a close partnership, but at one New York event in July, their kinship led to a particularly awkward moment.
It was after Nokia had unveiled the Lumia 1020 and its 41-megapixel camera. AT&T Mobility CEO Ralph de la Vega had just walked off stage after extolling the virtues of the device and touting its exclusive partnership, and then-Nokia CEO Stephen Elop began fielding questions about the device. Which is when things got testy.
"AT&T has been a terrible partner for Lumia devices," said one audience member, clearly a fan of the direct approach. "So what have you done to make sure this terrific phone doesn't get the same crummy treatment from AT&T?"
The question may have been inflammatory, and maybe even a little unfair, but it underscores the frustration and disdain that many customers have for exclusivity deals -- agreements between a handset vendor and a carrier that keeps a specific smartphone or tablet locked into one partner for a set period of time.
But the truth is, exclusivity deals are a necessary evil. While they irk consumers, they are lucrative for both carriers and handset vendors. Such agreements provide an incentive to the carrier to order more phones -- often at higher volumes than if the vendor shopped its phone around to all carriers. The deals also force the vendors to up their game with unique devices as they compete for limited exclusivity slots at each carrier.
"It actually helps consumers by bringing more devices to the market," said Roger Entner, an analyst at Recon Analytics. "There would be less competition if there wasn't exclusivity."
AT&T, more than any other US carrier, has shown a knack for snagging exclusive phones. The latest is Nokia's Lumia 1520, a jumbo-sized flagship phone and the follow-up to the previous AT&T-exclusive Lumia 1020. It's the continuation of a 2-year-old relationship, when AT&T became one of the first carriers to bet on Nokia in a big way. The Lumia 1520 goes on sale in AT&T stores on Friday.
The Lumia 1520 joins the long list of high-profile smartphones that AT&T has locked up over the last few months, a lineup that includes the rugged Samsung Galaxy S4 Active and phablet LG Optimus G Pro, as well as one phone AT&T would like to forget, the Facebook Home-powered HTC First. When Motorola unveiled its Moto X across a number of different US carriers, AT&T held the exclusive rights the Moto Maker customization option, which was the phone's signature feature. That exclusivity period lifted earlier this month after the launch in late August.
So what's the secret to AT&T's success? CNET talked to Bradley to understand some of the deals. His quick response: there is no magic formula.
"Each one of these deals has a different genesis," he said. "There's no cookie-cutter way we do this."
Why exclusivity makes sense
It wasn't a big surprise that AT&T and Nokia were partnering up again on the Lumia 1520, especially since they'd worked together on the Lumia 1020 and the earlier flagship Lumia 925. While Nokia does build "exclusive" phones for the likes of Verizon Wireless and T-Mobile, AT&T gets the good stuff first.
AT&T was looking to expand its portfolio of phablets -- or oversized phones given that nickname because they almost veer into tablet territory -- and saw an opportunity to do so with Nokia, according to Matt Rothschild, vice president of North American sales and marketing for the handset maker.
"They wanted another option for their consumers from another well-known brand," Rothschild said.
Exclusivity deals are a symbiotic pact between two parties. The carrier gets a unique product that it can use to get customers into its stores. In turn, the handset vendor gets focused marketing and sales support. It's for that reason Nokia, which lacks the resources of an Apple or Samsung, has continued to cozy up to AT&T.
"We're very much having to make decisions where we place our bets and where we concentrate our resources," Elop told CNET in July. "It's more effective to go with a specific partner."
Yet Nokia didn't exactly explode out of the gate despite the backing of AT&T and Microsoft. It wasn't until the company got the Lumia 1020 at AT&T, the Lumia 928 at Verizon Wireless, and the Lumia 925 at T-Mobile that it started to see progress in the US. Spurred by three unique "flagship" phones at three national carriers, the company posted a breakthrough period in North America in the last quarter, with unit sales surging 367 percent to 1.4 million as revenue jumped nearly 500 percent to 214 million euros ($293.5 million) -- not huge on an absolute basis, but a mark of steady progress.
Of course, Apple and Samsung have succeeded in getting their phones into every carrier, so why not a Nokia or HTC? Their success has proven to be the exception rather than the rule. Apple is, well, Apple, and Samsung has been able to build its brand by simply outspending the competition on marketing.
There have been few successes outside of those two giants. HTC attempted to emulate the single flagship phone strategy with the critically loved HTC One, but interest in the company's products continues to wane. BlackBerry, meanwhile, opted to get its Z10 to as many carriers as possible, but ended up getting muted support. Motorola's Moto X and LG's G2 haven't exactly lit up the market either.
An exclusivity agreement, in contrast, tends to give a carrier more confidence in a product's potential performance, allowing for a larger volume order. But if the product is going to be available everywhere, carriers tend to be reluctant in committing to too many units, and will reserve their sales and shelf space for an exclusive product that can get customers into its stores.
"It's in both the best interest of device manufacturer and carrier to have a commitment on volume and for carrier to have differentiation," Entner said.
No handset manufacturer purposely looks to limit their distribution, said Keith Nowak, a former employee of both Nokia and HTC. In a blog post, he said that these companies tend to enter exclusivity deals not because they're the best strategy, but because they're the only one. Citing the disappointing performance of the HTC One and Moto X, he called 2012 a "last hurrah" for cross-carrier phones and predicted a move back to the traditional model.
"Expect to see following generations either released as exclusives, or at best, only available in heavily carrier-customized form," Nowak said.
From AT&T's perspective, the company believes it has moved more aggressively and focuses more on product portfolio than the competition.
"With a lot of phones, we probably reacted more decisively once we see it," Bradley said. AT&T has more than a decade's worth of marquee phones to back up that claim.
From Razr to iPhone
Think back to 2004, when the biggest advancement in cell phones was the inclusion of a rudimentary camera. Nokia was completely dominant with an assortment of candy bar-shaped phones.
Then Motorola introduced the Razr, and all of a sudden, thin was in.
Sprint actually had first crack at the device, and ended up passing, according to a person familiar with the launch. The leadership from Cingular (the predecessor to today's AT&T), which included Bradley and de la Vega, jumped on the device and used it as the face of the carrier, which had just merged with the old AT&T Wireless.
The team used the same strategy a few years later when it partnered with Apple to sell the first iPhone in 2007, and the iconic smartphone became the face of the company, which had again rebranded itself the "new AT&T" at the end of the previous year.
"This is a once-in-a-lifetime moment to change how the public views AT&T as a wireless company, and to change internally how we view AT&T, a wireless company," CEO Randall Stephenson told Forbes early this year.
The lore behind AT&T and de la Vega's secretive efforts to secure the iPhone, sight unseen, as well as the impact that arrangement has had in the industry, is by now well known.
But it's of note that AT&T was again not the first carrier picked to work Apple; Verizon Wireless had first dibs and passed because it didn't want to give up so much control to then CEO Steve Jobs.
That AT&T was willing to commit big to the two devices -- in hindsight, shrewd deals -- underscores one of the big reasons it continues to score exclusives. Handset makers feel they have a fair shot of scoring support for smartphones with a unique edge or different platform.
"They've made some bets that Verizon hasn't," said Gartner analyst Ken Dulaney. "You've got to give them credit for it."
Last November, Bradley made the routine trip to Samsung's headquarters in South Korea to check out some of its upcoming products. Among others, he was shown the model that would become the Galaxy S4 Active. It wasn't a product he was expecting to see, and even the Samsung executives weren't entirely sure about its viability. But Bradley pounced on it.
"We knew there would be a market more than Samsung anticipated," he said. "We made the deal on the spot."
It was a rare gut move in an industry in which phones often go endure a harsh battery of tests and approvals before they're deemed good enough for a carrier.
Having familiar faces like Bradley and de la Vega, who have worked together for nearly a decade, helps the carrier get front-row seats to new products.
It also doesn't hurt that AT&T was the largest US carrier using the globally dominant GSM standard -- which allowed companies to launch in the US first and then take the same phone overseas. Even as the world moves to LTE, having GSM as the fallback 3G standard gives AT&T an edge over a Verizon or Sprint, which employ a lesser use standard called CDMA.
AT&T's focus on the right devices was also an outgrowth of Verizon's work building up its reputation as the pre-eminent reliable network. While AT&T has more recently caught up to Verizon in network quality, it was only a few years ago that AT&T buckled under the stress of traffic brought in by the iPhone. Still, people flocked to the carrier, well, because it was the only place to get an iPhone.
Good partners, bad bets
AT&T's willingness to go out on a limb didn't always result in a game-changing hit, but at least illustrated the lengths it would go in working with a partner.
BlackBerry had just cranked out a disaster of a phone in the Storm, which Verizon had touted as its flagship device for the 2008 holiday season. But the negative press didn't deter Bradley and de la Vega, who flew up to BlackBerry's Waterloo, Ontario, headquarters in early 2009 to talk about its own touch screen smartphone.
That the top two men in AT&T's wireless organization were visiting BlackBerry wasn't unusual; that they would come knocking so early was. Bradley or de la Vega would typically show up to see a more finished product, but this time around they wanted to make sure BlackBerry and AT&T were in sync from the start.
Engineers "pulled out a platter" of different BlackBerry prototypes. There were full touch screen devices, including one with a mechanical display like the Storm, ones with physical keyboards, and others with horizontal and vertical sliders.
AT&T's team gravitated toward the touch screen device with a vertical keyboard slider, and pushed BlackBerry to get its act together with the browser. AT&T's team then helped with the user experience and refined what had been a rough prototype.
Nearly two years later, in the late summer of 2010, de la Vega stood on stage with then-co-CEO Mike Lazaridis to announce the BlackBerry Torch.
While Bradley said the Torch performed decently, the phone ultimately didn't slow BlackBerry's descent, and even Bradley conceded that the phone was about halfway to what he would like to have seen.
Sometimes those flops lead to better relationships. Following the success of the Razr, AT&T partnered with Motorola again on the Rokr, a cell phone that could work with iTunes, and was considered Apple's first attempt at a mobile phone. The phone was a disaster, panned for its aged design and limited capabilities, but helped paved the road to its future work on the iPhone.
AT&T can only hope for a similar outcome from its relationship with Facebook. Back in April, de la Vega stood alongside Facebook CEO Mark Zuckerberg and HTC CEO Peter Chou in unveiling the HTC First, an Android smartphone smothered in all things Facebook, thanks to the social networking titan's Facebook Home software.
In the fall of 2010, Facebook came to AT&T to help build a "Facebook" phone with HTC. That AT&T was chosen as a partner was a product of the carrier spending the last few years building up credibility in Silicon Valley, helped by the work done by its "Foundry" innovation center in Palo Alto, California, as well as its exclusive deal with Apple.
The HTC First, known as the "Facebook phone," was an unmitigated dud. Despite AT&T's support it fell into the bargain bin just a month later, and forced Facebook to retool Home to be less overwhelming. The phone also did little to help HTC reverse its sliding revenue and profits.
"There are times where we made bets, and we were wrong," Bradley said. "Hopefully, it wasn't because of lack of commitment."
It's that commitment that has partners eager to work with AT&T even if -- judged by the potential customer base -- the carrier isn't the best place to be. Despite aggressively diversifying its product portfolio, its smartphone sales remain tilted toward iPhones. In the first quarter -- the last period for which AT&T has disclosed iPhone sales -- the company said that 4.8 million out of its total 6 million smartphones sold were iPhones. For a competitor trying to get its phone noticed, that's not a lot of potential customers to work with.
Verizon Wireless, by contrast, has a more diversified mix in which the iPhone often makes up less than half of total smartphone sales, as well as a larger base of customers. It also has its own Droid franchise of Android phones, and a handful of other exclusives.
Still, whether it's Verizon being too picky and stringent with its testing, AT&T's relationships, or network compatibility issues, vendors have tended to veer to AT&T with its top-tier products.
Clearly, there's frustration among consumers who don't want to be told to jump to a specific carrier for a certain phone. Looking back to that event in July, Elop responded to the audience member with polished tact, taking accountability for Nokia's poor showing in the US and insisting that he was pleased with the support AT&T has provided.
Bradley was a little more blunt when asked right after the Q&A ended: "It was a cheap shot." He argued that it was unfair to pin the blame of Nokia's struggles on AT&T, citing the difficulty of introducing a wholly different operating system in Windows Phone.
But the realities of the business and of the smartphone markets are more complicated than making a phone available to more customers. In an environment in which a Samsung ad seemingly pops up after every other commercial break, having a good product broadly available simply isn't enough. If you're not Apple or Samsung, you need marketing support, prominent shelf space at retailers, and salespeople willing to tout your phone.
So like it or not, these exclusivity deals will keep happening. And AT&T, more often than not, will be in the mix.
"We tend to be there earlier and more often," Bradley said. "That starts the conversation."
(CNET's Jessica Dolcourt contributed to this story.)