AT&T, Apple differ on the iPhone gap

Apple reported selling 270,000 iPhones the first weekend, while AT&T activated only 146,000 by midnight June 30. Where did those other 124,000 iPhones go?

Tom Krazit Former Staff writer, CNET News
Tom Krazit writes about the ever-expanding world of Google, as the most prominent company on the Internet defends its search juggernaut while expanding into nearly anything it thinks possible. He has previously written about Apple, the traditional PC industry, and chip companies. E-mail Tom.
Tom Krazit
5 min read
The honeymoon might already be over between Apple and AT&T.

The two partners stood in stark contrast Wednesday evening following the results of Apple's third-quarter earnings, in which the company revealed it sold 270,000 iPhones in the first 30 hours the product was on sale. Earlier in the week, AT&T said it had activated only 146,000 iPhones during a similar period of time.

The innovative activation scheme that Apple and AT&T came up with for the iPhone launch made life much easier for many early iPhone customers, in that they could take their new purchase home and activate it from the comfort of their living room. It also made for a stressful weekend for those who ran into problems activating their iPhones.

Both Apple and AT&T initially said that a small number of customers ran into activation problems. AT&T said the "vast majority" of customers sailed through the activation process, and Apple said "a small percentage" of customers were affected by the activation delays.

"They deserved a lot to put up with AT&T. But Apple's not a big enough part of their business to get them to fix their problems."
--Gene Munster,
Piper Jaffray analyst

But what's to account for the 124,000 iPhones that were sold by Apple but not activated? Apple and AT&T were not on the same page in the early hours after Wednesday's conference call.

"We activated 146,000 iPhones from 6 p.m. on Friday until midnight on Saturday," said Mark Siegel, an AT&T spokesman. "Apple's results are what they are."

When asked to explain the discrepancy, Siegel initially cited three factors. First, he said that Apple counted sales of iPhone accessories along with the sales of the actual iPhones themselves, citing a footnote in Apple's earnings release with that language.

Apple spokesman Steve Dowling, however, said that footnote refers only to revenue from iPhone accessories, not unit shipments. The 270,000 shipment figure in Apple's earnings release is all iPhones, and doesn't include headsets, cases or other accessories, he said.

AT&T's second explanation was that Apple's 270,000 iPhones included sales of iPhones through Apple's online store, which obviously couldn't have been activated the first weekend since Apple is quoting two- to four-week lead times for iPhones ordered online.

But Apple Chief Financial Officer Peter Oppenheimer specifically said on the conference call that the 270,000 units reflected only iPhones that were sold to AT&T for distribution through its network of retail stores and iPhones sold through Apple's retail stores. No iPhones sold through Apple's online store were included as part of that 270,000 unit figure, the company later confirmed.

Procrastination and profiteers?
The third reason offered by AT&T for the gap between sales and activations was procrastination. "One of the reasons for the gap is that many, many people chose to activate their phones a day later. That seems pretty straight forward," Siegel said.

This is quite possible, but extremely difficult to quantify. Given the zeal of those who waited in line for an iPhone on Friday or bought one the following day, however, it's hard to imagine 100,000 or more of those customers waiting a day to activate their new toy.

But those who were hoping to flip their iPhones on eBay or Craigslist could account for the some of those who waited to activate, since many sellers did not receive the number of bids they had once hoped to receive in the first 30 hours the iPhone went on sale. Some might have returned unopened boxes without activating the iPhone when met with lackluster demand.

Siegel also pointed out that since AT&T sold out of its iPhone allotment very quickly on Saturday, the gap could reflect iPhones that were being shipped to AT&T stores for Sunday's business. Oppenheimer also seemed to think this was a possibility. "There would have been some inventory in transit to AT&T at the end of the quarter," he said on Apple's conference call. But neither company wanted to quantify how many iPhones were in transit.

The back-and-forth calls into question just how widespread those initial activation problems were among the iPhone early adopters. AT&T reiterated Wednesday that it thought the problem was confined to a small number of users.

"We said all along that the activation process worked extremely well. There were only a very small percentage of customers--in the low single digits to be exact--that had activation issues. It was a very, very small percentage," Siegel said Wednesday.

The exact number affected by the activation issues may never be quantified. When the problems first surfaced, Reuters quoted an anonymous source that said 2 percent of iPhone customers ran into activation problems. But AT&T wouldn't confirm that number Wednesday.

Assuming that's true, and each affected customer bought one iPhone, 2 percent of the total number of iPhone units sold in the first 30 hours would be 5,400 units, a far cry from the 124,000 gap between Apple's numbers and AT&T's figures. Assuming everyone affected by the activation problems bought two iPhones from an Apple store--which would be pretty much an impossible coincidence--that would account for 10,800 units out of commission on Friday night and Saturday.

So, the official explanation for the discrepancy appears to be that more than 100,000 iPhones were either in transit Saturday night or still sitting all alone in their boxes inside tech-savvy homes around America, waiting for activation.

While the activation problems might have angered new AT&T customers, it's unlikely that the problems will have a long-term effect on iPhone sales since they appeared to be cleared up very quickly, said Gene Munster, an analyst with Piper Jaffray. "It's a nuisance, but it doesn't change the fact that people still want the phone."

And while the 124,000-unit gap might be a source of stress between the two partners, Apple is being compensated for any problems that AT&T might have had, Munster said, referring to the revenue-sharing agreement between the two companies that was confirmed by Apple's Oppenheimer on Wednesday.

"They deserved a lot to put up with AT&T. But Apple's not a big enough part of their business to get them to fix their problems," Munster said.