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When Apple announced the iPad at the end of January, it was met with both excitement and contempt. There had been so many rumors leading up to the announcement that it was guaranteed to leave somebody disappointed. One of the questions leading up to the event was “How would it connect to the internet?” WiFi seemed to be a given, but lots of people hoped there would be a 3G option as well. But along with the prediction of 3G was the hope of maybe Verizon or even Sprint as data providers this time instead of AT&T. But during the keynote Apple announced to a stunned audience that they would once again be working with AT&T.

Why AT&T Again?

Since that announcement, lots of people have asked “Why AT&T again?” This question is based on the fact that many people have been very disappointed—and even frustrated—by the performance of AT&T’s 3G network performance and coverage. There are states like North Dakota and South Dakota where AT&T has little or no coverage at all, and even the big cities like New York or Los Angeles have been plagued by very poor performance. My experience has not been so bad. I live in a rural area that also happens to be covered by AT&T’s 3G service, and it works very well. I know this has not been the case everywhere, and I can attest to that when I travel to places like San Francisco or Chicago. I also experienced the coverage issues as I traveled cross country this past summer. But I think the answer to why AT&T was chosen again is not as much an issue of network performance as it is network technology.

There are four primary cellular networks in the United States: AT&T, Verizon, Sprint and T-Mobile. Verizon and Sprint use a type of cellular technology commonly referred to as CDMA. CDMA is an excellent and efficient system, but it is not compatible with the GSM standard that AT&T and T-Mobile use. It is also not very popular outside of the United States. Although there are other CDMA networks in the world, there are many more GSM networks. In fact, almost every place that has a CDMA network has a GSM network, but huge portions of the world, like Europe, only have GSM. By choosing GSM, Apple made sure the iPad will work on the maximum number of networks available today. This means more sales opportunities for Apple, and it means easier traveling for their customers.

Choosing GSM for the iPad also allows them to leverage the already established relationships they have all over the globe. So, it was never really a question of GSM or CDMA. It was more a question of do they just use GSM or do they make a CDMA capable version as well. CDMA would also make it more difficult for it to be an unlocked device since the CDMA systems do not have a swappable alternative to the SIM that GSM uses. This means that a Sprint device will rarely be capable of working on Verizon’s network and vice versa. So, that leaves us with AT&T and T-Mobile here in the states but T-Mobile uses a frequency range for their 3G here that is incompatible with not only AT&T, but also everyone else in the world. So, the only network in the US that is truly a globally compatible network is AT&T.

Another likely answer to the question of why AT&T may be the sweetheart deal that Apple was able to get for the iPad data plans. $14.99/month for a 250MB plan and $29.99/month for unlimited data on the iPad are both really good deals. But they become even more amazing deals when you realize that they are completely contract free. This is a big selling point for the iPad. But why would AT&T allow such great deals for an unlocked device that is likely to bring more data usage to their already struggling network? We don’t know, but there are two likely possibilities.

The first is that AT&T—and possibly the entire industry’s business model—is beginning to change, and they are making data more accessible and affordable. This could be a big win for AT&T because it is much easier for their GSM network to easily accept unlocked devices that they do not sell or even have to approve. But I think the other possibility is more likely, and that is that Apple is using their existing relationship with AT&T to get a special deal with the iPad, and they are using the next generation of the iPhone as a carrot. I think the answer will become obvious in the coming year.

If we see that AT&T begins to allow other data-only devices—like netbooks from Dell or HP—to have the same kind of data packages and/or we see Apple releasing a Verizon iPhone this summer, then we know that it’s the first answer and AT&T is trully trying out a new and aggressive data business model but they gave Apple the big splash of announcing it with their device. However, if this deal stays exclusive to Apple with the iPad and possibly the next generation of the iPod touch, then we know that Apple was able to squeeze out a good deal from AT&T.

Will we be stuck with AT&T forever?

That brings up the next question; “Will we be stuck with AT&T forever?” I think the answer is that we will have to rely on AT&T for a little while longer, but that eventually Verizon will become an option. AT&T had and still has an exclusive on the iPhone in the U.S. Originally, there was clearly a contract that gave them that exclusive, but the details of that agreement have never been made public. The initial rumor was that AT&T had a five year deal, but then the rumor became a three year deal. Either way, this length of exclusivity is very rare in this industry, especially for a high profile device such as the iPhone. But Apple needed someone to take a chance on them because they were untested as a cell phone provider and they wanted to do things in a very different manner. AT&T gave them that chance, but got a great deal in the bargain. However, AT&T became a victim of their own success.

As the iPhone quickly took over the U.S. market, it began to take a toll on the AT&T network. AT&T was charging iPhone customers a premium for their unlimited data plan, but they did a lousy job realizing those customers would actually use that data. Up until now, most smartphone data usage was actually pretty light, but Apple’s success in making the iPhone easy to use and a better browsing experience changed that. The network struggled the first year, but it really got slammed as the app store opened up. AT&T panicked, and instead of rapidly improving their network, they played games trying to limit what customers could do on the network. Essentially, they were hoping to force customers into their usage models instead of changing those models and improving their network. It was a bad mistake on their part, and they wasted a lot of time. It was a series of mistakes in foresight and response on AT&T’s part, but they are paying for it as they now have a much poorer reputation as a service provider.

But to be fair to AT&T, the iPhone really was a game changer, and its success in the U.S. would likely have done the same thing to Verizon or Sprint’s networks had they been the chosen one. For the first time, a mass market cellular data device was actually being used heavily for data, and no one really saw that coming. But AT&T’s response to this is what has earned them their current reputation and disdain from many of their customers who feel trapped.

If not forever, then when?

We are now approaching the end of the third year of the iPhone. I think it is likely that the original agreement was a three year agreement, and that the iPad’s data plans—as well as recent improvements in AT&T’s network—are likely a concession for having the agreement extended another year or two. This makes a lot of sense for both companies. The iPhone has been a huge success for AT&T, and although the network upgrades it is causing will cost them, it can only help them in the long run.

But this also makes sense for Apple. I’m sure they would love to have the iPhone on other networks in the U.S. like they have in many of the other countries all over the globe. Having both Verizon and AT&T would give them access to far more customers than having either one alone. But, at this point, it seems unlikely Apple would come up with a CDMA version of the iPhone to operate on Verizon’s 3G network and only on Verizon’s 3G network. That kind of customization would be expensive and make their technical support costs much higher as well.

However, I still think a Verizon iPhone will likely come in the summer of 2011, but could be pushed out to 2012. The reason is 4G. AT&T and Verizon may use very different techs for their 3G data, but they are both planning to use LTE for their 4th generation (4G) data services, and so are most of the world’s carriers. So, the easiest path to multiple networks in the U.S. is to sell a 4G capable phone that could then fall back to using legacy technologies when they are out of 4G areas. Chipsets are being made today that will allow LTE handsets to work with either CDMA or GSM. Verizon will begin rolling out their LTE network this year, but AT&T is not expected to start until 2011.

So, for now, sticking with AT&T for another year or two means Apple can keep the simplicity of GSM but also use the iPhone exclusivity deal to help them sell other products. The economics are likely to change in the future, but for now, this answer makes a lot of sense from Apple’s perspective. We need to remember that Apple tends to think long term and rarely trades in those long term goals for short term successes.

Read [The iPad: To 3G or not 3G?]