Monday, July 12, 2010

What if AT&T Loses iPhone Exclusivity?

AT&T shouldn’t fear losing its iPhone exclusivity. The contract could run out by early next year, though neither AT&T nor Apple is saying. If it does, AT&T’s customer growth would probably slow. Yet if its rival Verizon were to land the popular smartphone, too, the industry’s pricing model would improve — along with returns from AT&T’s existing iPhone customers.

A mass customer exodus is unlikely. Some users in big cities complain about AT&T’s coverage and dropped calls. But the percentage switching to a rival carrier would probably be low, based on the iPhone experience in France and Britain. Most consumers have contracts that aren’t near expiration. Switching incurs a termination penalty, and would require the purchase of a new iPhone.

The bigger immediate effect would be slower growth. AT&T’s share of the United States market has risen to almost 30 percent thanks to the iPhone. The company added 1.9 million new wireless subscribers in the first quarter, more than 45 percent of them iPhone users ditching other carriers.

A slowdown might not be so bad for AT&T shareholders. The iPhone’s success has prodigiously increased demand for data. But all these new customers may not be providing enough of a return to justify the cost of acquiring them and building the needed infrastructure. Analysts at Sanford C. Bernstein & Company estimate that iPhone subscribers might be worth nothing to AT&T.

It may seem paradoxical, but losing iPhone exclusivity could be addition by subtraction for AT&T. The industry has priced data plans poorly. Smartphones traditionally came with all-you-can-eat policies. With the most popular phone, AT&T has attracted gluttons. It recently switched to a tiered model for new customers, who will pay for usage.

Rivals have so far resisted following suit. This hurts AT&T. If Verizon were to land the iPhone, however, it would probably adopt tiered pricing too, to avoid inheriting AT&T’s least profitable customers. Others might also join in to keep up with the market leaders.

AT&T trades at about 10 times its forecast 2011 earnings, according to Thomson Reuters estimates, a 15 percent discount to Verizon. That suggests investors are overly worried about just what losing the iPhone means to the bottom line.

Comptroller Wanted

Washington-based institution seeks new leadership after near-brush with death. Strong executive skills required to manage merger with failed rival. Banking and regulatory experience are essential. Must love consumers. Lobbyists, academics needn’t apply.

That’s not how the White House will recruit its replacement for John C. Dugan, the comptroller of the currency who is leaving next month. But maybe it should. Given the many challenges the new chief will face, a broad range of experience is indispensable.

First up is restoring the reputation of a regulator that’s been accused of lax oversight of banks before the financial crisis and having scant interest in consumer protection.

Next is helping to put into effect myriad new provisions of the soon-to-pass financial regulatory overhaul, including the absorption of the smaller Office of Thrift Supervision, the regulator that missed the failings at the American International Group’s financial products arm and at the lenders Countrywide, Washington Mutual and IndyMac. The comptroller will also sit on the new systemic risk council with the Treasury secretary, Federal Reserve chairman and other financial regulators.

If President Obama is looking for a candidate already intimately involved in the transformation of the nation’s regulatory architecture, he could go with Daniel K. Tarullo, a Fed governor and an expert on bank regulation. But why would he want the job? Although the Office of the Comptroller of the Currency will pick up the powers of the thrift regulator, oversight of the biggest bank holding companies will be the purview of the Fed. In that respect, the O.C.C. could be a step down for Mr. Tarullo.

That paves the way for more of an up-and-comer, like Richard H. Neiman, New York’s top state bank regulator. Mr. Neiman knows Washington, too. He worked at the O.C.C. earlier in his career and serves on the Congressional oversight panel for the bank bailout. Even better, Mr. Neiman has private sector experience as head of TD Bank USA.

True, a business background would make him an anomaly among Obama appointees. But it would help him understand the real-world implications of his decisions. Whatever the choice, the White House needs to get cracking on defining, and filling, the position to achieve its hoped-for transformation of the financial regulatory system.