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How AT&T and Verizon Made T-Mobile's iPhone a Reality

By Evan Niu, CFA – Mar 28, 2013 at 12:00AM

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All it took was a failed takeover attempt from AT&T, a motivated spectrum swap with Verizon, and nearly six years of waiting for Apple to feel like it was worth it to engineer a device compatible with the fourth-largest domestic wireless network.

In the wireless war over smartphone subscribers, Apple's (AAPL -4.38%) iPhone has proven to be an invaluable weapon. AT&T's (T -1.74%) initial and risky bet to carry the device sight unseen paid off in spades, as Ma Bell started scooping up lucrative smartphone users en masse. Verizon (VZ -1.45%) Wireless took note and once it became an iPhone carrier, it promptly began to outpace its smaller rival in smartphone subscriber growth.

Yesterday, T-Mobile finally became an official iPhone carrier, making Apple's device available on all four of the largest domestic wireless carriers. Before that, the iPhone and T-Mobile were kept apart due to technical spectrum incompatibilities that relegated the iPhone to 2G data speeds for unlocked device users.

Source: T-Mobile.

As it turns out, both AT&T and Verizon played a part in facilitating their smaller rival getting Apple's flagship -- at long last making the T-Mobile iPhone a reality.

Ma Bell's consolation prize
It seems like just yesterday that AT&T failed in its attempt to acquire T-Mobile, but that was nearly two years ago at this point. It was a jaw-dropping $39 billion deal when it was initially announced in 2011, one that would be heavily scrutinized and eventually vetoed by regulators, since the No. 2 and No. 4 players in the industry joining forces to take down the No. 1 had important and potentially negative implications on the overall competitive landscape.

That's a stark contrast to regulator stance on T-Mobile's proposed merger with MetroPCS (TMUS -1.56%), which amounts to the No. 4 and No. 5 players pairing up to put more competitive heat on the top three. Regulatory bodies have chosen not to object and will forever hold their peace regarding the union, so long as shareholders nod in approval.

The consolation prize for the failed acquisition included a $3 billion breakup fee from AT&T, made payable to T-Mobile parent Deutsche Telekom, and a negligible roaming agreement, but more importantly the smaller carrier also received Advanced Wireless Service, or AWS, spectrum licenses in 128 markets from Ma Bell.

Big Red's big red heart
Fast forward six months and T-Mobile would separately ink a spectrum agreement with Verizon, purchasing or exchanging additional AWS licenses in 218 markets throughout the country. That greatly benefited T-Mobile's spectrum position by allowing the carrier create more contiguous blocks of spectrum and realign its airwave holdings in adjacent markets. That boosted T-Mobile's data performance and throughput speeds in numerous key markets, and was all made possible by the swap with Verizon.

Naturally, Verizon didn't agree to the swap out of the kindness of its big red heart. Big Red had been looking to purchase a 20 MHz block of AWS spectrum for $3.9 billion from a handful of cable companies and was getting mean looks from regulators. The AWS swap helped pave the way for Verizon's larger deal, even if it helped beef up T-Mobile's network in the process.

The net result of all of this was that T-Mobile ended up with a bunch of AWS spectrum, which it would use to add HSPA+ capacity and to roll out LTE in 2013.

Enter Apple
The iPhone has historically not been compatible with networks on AWS spectrum bands. In January 2012, T-Mobile CTO Neville Ray noted that AWS chipsets are available to Apple if it wanted to use them in upcoming iPhone models. When Apple initially launched the iPhone 5 in September, the device did not include AWS support. That fact led some industry watchers to doubt the reports that T-Mobile was preparing to launch an iPhone.

The big presumption there was that Apple was unwilling to cater a slightly reengineered device for T-Mobile's network, a somewhat reasonable notion because the Mac maker had demonstrated as much for years. Well, Apple quieted the doubters: It slightly modified one of the GSM variants (model A1428, the same one used on AT&T's network) of the iPhone 5 to add AWS support (1700 MHz and 2100 MHz frequency bands). To be clear, this is an actual hardware modification that Apple has made, and existing A1428 models can't simply receive software updates to add AWS support, and Apple will be phasing out the old version. Out with the old A1428 and in with the new A1428.

Finally, T-Mobile can officially offer an iPhone at respectable HSPA+ speeds (which it markets as 4G). All it took was a failed takeover attempt from AT&T, a motivated spectrum swap with Verizon, and nearly six years of waiting for Apple to feel like it was worth it to engineer a device compatible with the fourth-largest domestic wireless network.

Fool contributor Evan Niu, CFA, owns shares of Apple and Verizon Communications. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$143.28 (-4.38%) $-6.56
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$38.82 (-1.45%) $0.57
AT&T Inc. Stock Quote
AT&T Inc.
$15.55 (-1.74%) $0.28
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
$133.41 (-1.56%) $-2.11

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