Apple, AT&T: Bosom budds or odd couple?

AT&T is straddling a precarious line between partnering and competing with Apple in the mobile music market. The company’s exclusive deal to sell Apple's iPhone for use on its network in the United States has been the envy of the wireless industry for more than nine months. But managing its own mobile music strategy while working with a tight-lipped and controlling partner like Apple is proving a challenge for AT&T, particularly as Apple launches new products and services that may compete with AT&T's own.

Like many partnerships in the tech industry, the Apple-AT&T combination is increasingly looking like "co-opetition," a term used to describe business partners that also compete. Apple, of course, is no stranger to co-opetition: For years, Microsoft, to name one company Apple works with, has sold software to run on the Macintosh operating system despite its own, more dominant Windows OS. Now AT&T is learning that the blurring of self-interest and cooperation is the price of doing business with a fast-moving outfit like Apple.

"With this deal, AT&T thought like a traditional phone company, focusing mostly on driving subscriber growth," said Michael Goodman, director of digital entertainment for market research firm Yankee Group. "But the partnership with Apple won't make AT&T a successful provider of digital entertainment."

AT&T is no stranger to mobile music. The wireless company, which until the merger of AT&T and BellSouth was known as Cingular Wireless, introduced its first music-capable phone, the Nokia 3300, in July 2003. Two years later, it introduced the Motorola Rokr, the first iTunes-enabled cell phone. But the phone (which was panned by critics for its 100-song capacity and was upstaged by the simultaneous unveiling of Apple's iPod Nano) is considered a flop.

Apple by far outpaces sales of all three major cell phone operators who sell music to mobile subscribers. In fact, all three carriers--AT&T, Sprint Nextel and Verizon Wireless--sold as much music for all of 2006 as Apple sells on average in three or four weeks, according to Yankee Group's Goodman.

Around the same time as the eMusic deal, AT&T launched its partnership with Apple, the leader in the portable music market with its popular iTunes music store and iPod music-playing devices. Under the contract, AT&T is the only carrier in the United States to provide cell phone service to the iPhone.

But unlike other phones sold by AT&T, the iPhone is largely controlled by Apple. And while it supports Apple's own iTunes software, it does not work with AT&T's own music store

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