AT&T iPhone Marketing and Indirect Distribution

Implications: AT&T withholding the iPhone from indirect channels has three considerations: 1) Some locations gaining traffic; 2) Other distribution losing business; 3) Customer service at agent stores.

Analysis:

AT&T not offering the iPhone through the indirect distribution of agent-operated stores and major retailers has trade-offs for sales, margins, and channel relationships.  AT&T controls the pricing by offering the iPhone only in company-owned stores and preventing indirect stores from using their activation commissions to provide additional discounts.  And using its own direct stores, AT&T saves the cost of paying the commissions to agents and retailers.  In announcing the new 3G iPhone, AT&T Mobility’s CEO Ralph de la Vega emphasized the goals of more volume and mass market penetration.  AT&T also appears to believe that indirect distribution is unnecessary if the iPhone creates demand that goes to the AT&T and Apple company-owned stores.

The problem for AT&T is the overall relationship with indirect channels.  The agents incur the costs of employees and storefronts that would be burdensome for a carrier.  Some agents are benefiting with the increased AT&T exposure from the iPhone and are selling other handsets.  Other agents, particularly large retailers, feel that they are losing store traffic for all devices and services by not having the iPhone.  Depending on the market, AT&T has provided store build-out funds in return for exclusivity and service commitments.  The intent was that exclusive stores would be full service to demo, customize and sell handsets for advanced network features.  But the relationship becomes strained when you service what you didn’t sell.  For other industries like consumer packaged goods, the supplier strives for strong collaboration with indirect distribution.  In mature wireless markets, the distribution is being complicated by more handsets and price points.  Verizon Wireless recently changed from in-house handset warehousing to contracting with Brightpoint for distribution to its indirect channels of authorized agents and retailers. 

The direct vs. indirect distribution might be resolved by future products from Apple such as the rumored nono-sized iPhone for the holiday season.  As Best Buy launches its Best Buy Mobile and makes a 50% investment in Carphone Warehouse, Apple might want the brand synergy of iPods and Macs in major retailers.  An issue could be cannabilizing iPod Touch sales if consumers cannot afford or do not want two devices.  When the 3G iPhone was launched, Best Buy pitched the success of the $130 Samsung Instinct with Sprint Nextel’s low $70 rate plan of 450 voice minutes and unlimited data.  And Radio Shack in its 2^nd quarter results attributed its 6.9% sales increase to postpaid activations from AT&T’s popularity.  Circuit City has the exclusive at Circuit City for postpaid, but Best Buy and Radio Shack want to attract wireless traffic to offset the slowing electronics sales.  Both retailers are advertising older models of RIM’s Blackberry Curve and Palm’s Centro at lower prices than the carrier stores.  AT&T’s recent announcement was that the Apple is exclusive with AT&T into 2010.  However, the distribution of iPhones could change with varying models and prices across distribution channels as major retailers focus on mobile handsets.