Leveling the Playing Field: the Rural iPhone - Wireless Week

It took more than four years for the iPhone to land at a regional provider. 

Between 2007 and 2011, when Mississippi-based C Spire Wireless began selling the iPhone, the popular smartphone was the purview of top-tier providers. 

Even after C Spire became the first regional provider to sell the iPhone last November, the device seemed to be out of reach for smaller operators, and its absence had a noticeable impact on regional providers. 

Alaska’s General Communications, Inc. (GCI) saw a slowdown in its subscriber growth when AT&T, its only current national competitor in the state, got the iPhone.

"We continued to see subscriber growth, but it was not nearly at the same rate we estimated AT&T's to be," says Maureen Moore, vice president of consumer services at GCI. "Had AT&T not had an exclusive on the iPhone, we would have tried to get it as soon as possible...if you didn't have the iPhone, you had to be looking at other ways to grow subscribers."

The issue prompted GCI to change course, focusing on niche rural markets where AT&T didn't offer service. But the strategy wasn't ideal.

"We knew that we needed the iPhone to effectively compete," Moore said. 

In April, that happened.

GCI, MTA Solutions, Appalachian Wireless, Alaska Communication Systems, Cellcom and nTelosâ€"none of which have more than a million subscribersâ€"each announced that they would offer the iPhone, and sell it at a cheaper rate than their larger competitors.  Even though they had to wait longer than Verizon Wireless and Sprint, they still got the iPhone before T-Mobile USA and U.S. Cellular.

GCI began selling the iPhone several years after AT&T, its main competitor, but customers still lined up outside stores for the iPhone's midnight release. 

"We had hundreds of people - they were really lined up at the door," Moore says.

The iPhone launch was the first time GCI had opened stores at midnight for a device launch and it wasn't clear how much demand there would be for a device that had been offered by a competitor for years. 

“I actually was a little bit skeptical,” Moore admits. Eight of its 42 locations opened early for the iPhone.

GCI had a couple of advantages. It was selling the iPhone 4S for $50 less than AT&T, and was offering it with slightly cheaper data plans. It also encouraged customers to pick its iPhone over AT&T’s by bundling the device with its cable Internet service, so customers who bought the iPhone with GCI would get more usage on their home Internet service. 

As with other regional providers to land the iPhone, it’s more than just a gadget to GCI. The iPhone is a tool that has reinvigorated its ability to compete with larger operators with bigger networks and a wider variety of devices.

Wisconsin-based wireless provider Cellcom reports that sales have been "huge" and churn is showing signs of improvement since the iPhone came on board last spring.

"Our customers really wanted it, that's really the bottom line," CEO Pat Riordan says. 

Without the iPhone, Riordan says Cellcom's historically rock-bottom churn rate began to hover around the 1 percent markâ€"an ominous sign for a company whose churn numbers typically stayed under a single percentage point. 

"You can only get so far behind before it becomes critical mass," Riordan says. "We really needed the iPhone for our customers." 

Cellcom has about 285,000 customers in Wisconsin and portions of Michigan's Upper Peninsula. Competitors include AT&T, Verizon Wireless and Sprint, all of whom offer the iPhone.

"Once we had the iPhone, customers have come back to use because that's the only reason they ever left," Riordan says. He declined to give Cellcom’s exact sales numbers for the iPhone.

Conrad Hunter, COO of nTelos, says adding the iPhone allowed the Virginia-based provider to “close the gap” with its competition. 

"The bottom line is it's an iconic device,” he says. “For customers that are really Apple centric, even though we had great Android devices, it left us with very little choices for those customers. It forced a lot more churn."

Meeting Apple’s Demands

Working with Apple is not like working with other cell phone manufacturers. 

“I think all OEMs can be somewhat demanding, but Apple has a unique capability to be extremely demanding,” says Ken Simpson, co-founder and co-CEO of management consulting firm Strong-Bridge, which helped support GCI's iPhone launch. “They can say not only to a company like GCI but to the national operators, ‘You will do the following.’”

Even so, when GCI found out last year that Apple was going to be taking applications from regional carriers who wanted the iPhone, "we decided to go for it,” Moore says.

And that's when the heavy lifting got underway. 

GCI worked with billing company Cycle 30 to fulfill Apple's requirements for the iPhone launch. The company needed to change both its point-of-sale operations and its back-end systems.

The upgrades were "more an overhaul than a slight remodeling," says Wendy Gonzalez, vice president of products and services at Cycle 30. The changes included tying together GCI's point-of-sale system with its billing system to make sure customers had a "seamless, positive" experience, and taking steps to ensure that its new iPhone subscribers paid the rate specified in their contracts. 

"The iPhone, like many smartphones, has a pretty big cost associated with it, so we have to ensure we get the associated revenue by having effective contract enforcement," Gonzalez says. 

GCI's old process required employees to make decisions about which rate plans were associated with a particular device, making the system prone to human error. The new system Cycle 30 put in place only allowed the appropriate plans to appear.

For instance, store employees might inadvertently give customers an unlimited data plan for the iPhone if the point of sale system can’t enforce the correct rate because it isn’t integrated with the billing system. Combing the two systems also allows operators to ensure that customers are charged the appropriate fees for upgrading to a new phone or cancelling their contracts.

"It was critical we be able to enforce that process," Gonzalez says.

GCI also had to meet requirements for the reporting, ordering, selling and receipt of the iPhone, some of "biggest IT requirements" of the project.

"Apple is world-class in supply chain management," Gonzalez says. GCI also wanted to offer Apple Care at the same time it began selling the iPhone, a goal requiring real-time integration between its systems and Apple's.

Some of Apple's requirements were already on GCI's roadmap, Moore says.

"At the end of the day, we're a better carrier as a result," Moore says. 

Like GCI, nTelos had to make a number of upgrades to meet Apple's requirements. In preparation for the iPhone launch, nTelos added additional data capacity to its network, made improvements to its retail stores and upgraded its point of sale systems, logistics and inventory control. 

"Apple is much more hands-on than our other OEMs," Hunter says. "They know what they're doing, and they know the way they want to do it." 

Even with the considerable investment required by Apple, Hunter expects the iPhone to be a net benefit for nTelos.

“We see it as very positive for our business this year and well into next year,” he says.

The iPhone is a long-term investment, since the upfront costs are too high for it to be immediately profitable. 

It’s been just nine weeks since Cellcom launched the iPhone, so the device’s expenses still remain higher than the financial benefits. When asked when he expects the device to become profitable, Riordan quips, "That's a question I get asked by my board." But he maintains that the iPhone will pay off in the long run. 

"It's already clear to me that it's a good deal," Riordan says. "We're not taking such a big hit that it's causing us to scream and holler... we've been profitable and we will be profitable this year as well."

Regional providers’ existing relationship with Apple carries another key benefit: when Apple launches the next version of the iPhone, it shouldn’t take years for companies like Cellcom to get it. GCI, nTelos and Cellcom all say they expect to get the upcoming generation of iPhones at about the same time as AT&T, Verizon Wireless and Sprint, helping their smartphone lineup stay competitive.

It’s still a mystery why Apple decided to work with regional operators in the first place. Simpson speculates that it may have been as simple as a strategic decision to push its products into the marketplace, but says that no one really knows for sure. For its part, Apple has not made any public comments on the issue and did not respond to requests for comment.

More Expensive? Not So Much.

The iPhone is widely believed to be more expensive to offer than other smartphones, a reputation reinforced by margin-crushing subsidies and numbers like Sprint's $15.5 billion four-year contract with Apple.

But Moore says that hasn't really been the case at GCI. "If you compare handset to handset, our costs are pretty close for the iPhone compared to newer Android devices," she says. GCI has not disclosed financial details of its arrangement with Apple. 

Sales of the iPhone at GCI are “on track with expectations,” though Moore declined to provide exact sales numbers. 

Riordan suspects that Cellcom is getting a fairer deal on the iPhone than on Android devices.   “We think we’re paying closer to the price the bigger carriers are getting…with Android there’s more discount being provided to other carriers,” he says. With Apple, “we feel there’s less of an unequal subsidy.” 

Riordan concedes that he doesn’t have any hard numbers to back up his suspicions, but his assertion seems plausible to Simpson. Because regional providers place smaller orders than top-tier operators, they have less power to bargain volume discounts with manufacturers, Simpson says.

The iPhone long served as a symbol of the vagaries of handset exclusivity deals. One month after the device popped up at GCI, nTelos and Cellcom, the Rural Cellular Association (RCA) withdrew its FCC petition on the issue. 

However, it would be a mistake to assume handset exclusivity deals don’t remain problematic for smaller providers, says Steve Berry, head of the RCA. 

"It's been a real tough road for the smaller carriers," he says.

Top-tier providers continue to dominate production capacity, leaving smaller operators to pick up the leftovers. And once they do get their hands on a device, sometimes a year after it first hits the market, they still have to prepare their network, a process that can take as long as nine months, Berry says.

According to Berry, the decision to shift the RCA’s focus away from device exclusivity stemmed from the challenge the lack of interoperability in the 700 MHz band poses to regional operators. 

"If you can't get interoperability, you can't get devices that work on your network in the first place," he says. "Unless you have interoperability, you still don't have handsets." 

Verizon's LTE network runs on band 13 and AT&T's LTE service operators on band 17. Most regional providers planned on using band 12 spectrum for LTE, but are now finding it difficult to procure equipment and phones compatible with their niche band class. The issue has even forced C Spire Wireless to set aside plans to use its 700 MHz spectrum for an LTE network set to launch in September.

So for now, the RCA is focusing its energy on collapsing band 17 and band 12 into a single class, with interoperability across the entire band the ultimate goal. Handset exclusivity remains an issue, just not the most important one.

The arrival of the iPhone at a greater variety of providers seemed to signal that Apple was open to working with the small guys, but the smartphone still remains out of reach for many, Berry says.

"We do have some members that chose not to get the product because of the enormous up-front costs," Berry says. "Many decided they cannot afford the iPhone."  

One of those operators was U.S. Cellular, whose CEO told investors last year that the iPhone "didn't make sense for our business economically” and the risks of carrying it were “unacceptable.” 

Operators take a big risk when they pursue the iPhone’s halo effect. But for some smaller operators, it appears to be serving as a guardian angel.

Three months after they began selling the iPhone, GCI, nTelos and Cellcomâ€"each of whom had been losing subscribers to larger competitors carrying the deviceâ€"report they’ve seen a rise in new customers. 

"The iPhone represents the first time people pursued the device first...and the carrier and the carrier relationship second. That's pretty significant," Simpson says. 

For regional operators, having the iPhone has helped level the playing field.