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An AT&T Mystery: Abrupt New York iPhone Shutdown

A brief halt in online sales of the Apple iPhone in the New York area kept alive concerns that AT&T's network isn't up to the task of handling smartphone traffic in some of the largest U.S. cities. Customers who shopped for an iPhone on AT&T's Web site and gave ZIP codes for areas in and around New York City were told that the device was unavailable during a period starting on Dec. 27 and lasting until the afternoon of the following day. Sales of the iPhone through AT&T (T) and Apple (AAPL) retail stores in the New York area, as well as via Apple's Web site, were unaffected. AT&T offered little explanation for the halt in sales, and Apple kept mum on the subject. "We periodically modify our promotions and distribution channels," AT&T spokesman Fletcher Cook said in a message sent via e-mail. Some analysts speculated that the change, however short-lived, was further confirmation that AT&T's equipment is too flimsy to handle the heavy data use typically associated with the iPhone. "Clearly AT&T is struggling with quality-of-service concerns," says Rich Doherty, head of the Envisioneering Group, a research firm. "It's the first time I'm aware of this happening with any wireless product." AT&T representatives didn't return repeated requests for comment. As the exclusive U.S. provider of iPhone service, AT&T has come under criticism for the quality of its network coverage. Verizon Wireless, jointly owned by Verizon Communications (VZ) and Vodafone (VOD), has alleged that AT&T's network is ill-equipped to handle the demands of modern 3G smartphones such as the iPhone—which in addition to making voice calls, also run a selection of data applications, including video, Web-browsing, and games. Verizon Wireless carries competing smartphones, including the Droid, which includes the Android operating system backed by Google (GOOG). bloggers mined AT&T worker commentsEven AT&T executives have acknowledged the problem publicly. At an investor conference earlier this month AT&T Mobility President Ralph de la Vega conceded network deficiencies in New York and San Francisco and that the company was trying to improve performance. He also said the company was looking for ways to get consumers to throttle back data use. Lacking information about AT&T's sudden move, bloggers sought to tease out details from conversations with AT&T customer service reps. One AT&T employee told, which first reported the change on Dec. 27, that "New York wasn't ready for the iPhone," and that it lacked a sufficient number of cell towers to meet the heavy data demands imposed upon the network by iPhone users. Later, Consumerist reported that AT&T employees were blaming the change on unspecified "fraudulent activity." In the past, people have bought large numbers of iPhones for resale in other countries where the device wasn't yet available. Now that it's retailing in 90 countries, demand for unofficial iPhones has diminished. One explanation might be that a sudden surge in orders for iPhones to be delivered to a small number of addresses in the New York area triggered AT&T's response out of concern that those phones might then be unlocked and shipped overseas to a country where the iPhone isn't yet offered. In that scenario, AT&T would be losing out on subscription revenue for phones it is selling at a subsidized price ranging from $199 to $299. The move may have been meant as a temporary measure. Another potential explanation: some type of credit card. According to payment processing firm CyberSource (CYBS), more than 1% of orders placed with merchants in the U.S. and Canada in 2008 later turned out to be fraudulent. The rate of fraudulent orders was twice as high for consumer electronics products. a security blanket on credit fraud?The survey also found that in 2008 merchants rejected nearly 3% of orders because they suspected payment fraud, down from a rate of nearly 5% in 2007. A large block of iPhones may have been ordered with fake credit-card numbers for delivery to addresses in New York. Rather than implement new measures to screen out the orders from legitimate ones, AT&T may have chosen briefly to shut off sales to all customers in the New York area until a proper fix could be put in place. The decision to cease sales temporarily did little to dampen demand for Apple stock, whose shares rose to a record on Dec. 28, gaining $2.57, or 1.2%, to 211.61. Apple shares have more than doubled this year. By comparison, the information-technology index of the Standard & Poor's index of 500 stocks has risen 61% in 2009. It's unlikely that the decision to cease sales was caused by a sudden spike in sales of the iPhone. Analysts have estimated that iPhone unit sales were above 11 million during the holiday quarter; sales through AT&T's Web site likely account for a small percentage of the total sold in North America. Even if the problem were caused by a sudden onslaught of iPhone buyers, customers in New York could likely be sent phones from other locations, says Tuong Nguyen, analyst with Gartner (IT). "If they were out of iPhones in the location that serves New York, AT&T could simply route a phone to the customer from somewhere else," he says. Whatever the cause, the incident did AT&T no favors from a public relations perspective. Says Envisioneering's Doherty: "The people at Verizon are probably popping open leftover Christmas champagne over this."
Hesseldahl is a reporter for
With Carlos Bergfeld in Silicon Valley

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