The iPhone: Angel or Demon Building Loyalty?

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Quick—name another smart phone besides the iPhone. The Blackberry, maybe? Yesterday’s news. In the smart phone industry, there is the Apple iPhone, and there is everyone else. Apple rightly gets all the buzz. But what about AT&T, the silent partner in this marriage? Nearly a year after the phone’s launch—which was covered with all the pomp and circumstance of a NASA moon landing—the question begs: has the iPhone actually delivered more loyal customers?

It’s a truism in the telecom industry that the right technology can build customer loyalty. Build a cool platform, load it with the latest hot apps, and watch the customers beat down your door. In the broadband world, this approach drives bundling—who wouldn’t be loyal to a company that can wrap up a hi-def DVR cable box, blazing-fast internet and cheap web-based phone service into one friendly package? It also drives the wireless industry in their quest to build the ultimate smart phone, a platform that puts voice, web-browsing, email and an mp3 player in the palm of your hand. Build it, God told Kevin Costner, and they will come.

And come they did. At first blush, the numbers look very good for both Apple and AT&T. A few months after the iPhone launch on June 29, 2007, USA Today reported that 90 percent of 200 early adopters in an online survey stated they were “extremely” or “very” satisfied with their phone, and 85 percent stated that they would recommend the device to others. A March 2008 Rubicon survey of 460 users reveals that 47 percent of iPhone buyers switched to AT&T from another carrier, and 35 percent of those switchers paid an early contract termination fee. Rubicon estimates that AT&T has enjoyed a revenue boost of roughly $2 billion from a combination of those switchers and existing AT&T customers upgrading their accounts. In eight months, AT&T and Apple captured 28 percent of the smart phone market. They even expanded that market, with 50 percent of users surveyed upgrading from other smart phones and 10 percent choosing the iPhone as their first smart phone.

Those numbers prompted AT&T chairman and CEO Randall Stephenson to proclaim, “Wireless data growth is also exploding. After upgrading to iPhone, customers have on average doubled data usage. There is huge potential ahead of us in wireless data, and we are early on that adoption curve.”

So the numbers reveal that the iPhone functions as an effective loyalty value proposition—right? Any loyalty marketing initiative that grew revenue by $2 billion, secured retention through two-year contracts and snagged 28 percent of the market in less than a year would find its architects on the fast track to the executive suite.

But there are some warning signs that suggest iPhone euphoria may level off. 75 percent of iPhone users are existing Apple consumers—either iPod or Mac owners. So while AT&T has enjoyed a nice acquisition benefit from the phone, Apple is essentially preaching to the converted. Half of iPhone owners are under 30 and 16 percent are college students—numbers which seem to tell a story of AT&T getting the chance to build lifetime relationships with the next generation of consumers. But the traditional smart phone market is made up of professionals in their 30s and 40s. This market has been tough for Apple to crack because most professionals use company-issued PDAs, and most of those company IT departments won’t support iPhone use. The danger, therefore, is that the iPhone’s core audience is made up of young early adopters. These customers will stay loyal to Apple and AT&T only until the next hot gadget comes along—say, Google’s upcoming Android smart phone operating system, which will allow rival carriers to encroach on the iPhone’s turf.

Apple itself has also been criticized for its “walled garden” approach to technology, which traps users into using proprietary Apple technology that won’t integrate with other platforms—songs downloaded from iTunes, for example, which play only on iPods, and a smart phone that forces you into a restrictive AT&T contract without offering faster 3G-based web browsing. A quiet rebellion has therefore sprung up among hackers offering downloadable software to break your iPhone out of jail and allow it to work on rival networks. While most consumers won’t bother, the signs are there that iPhone users are vulnerable to switching. There’s no denying that Time magazine’s 2007 Invention of the Year is a design breakthrough. But it will be up to AT&T and Apple to add value that creates loyalty to their brands, and not just to the device.

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