Apple's icing on Cingular's cake

NEW YORK (Fortune) -- By the time Apple's Macworld Expo rolled around in early January, Steve Jobs' plan to launch a cell phone wasn't much of a surprise -- in fact, the much-blogged-about iPhone was probably the worst-kept secret in technology. The big shocker was his decision to grant a multi-year U.S. exclusive to Cingular, a wireless operator that just a few years ago was one of the wireless industry's most hapless operators.

In case you'd forgotten, AT&T (Charts)-owned Cingular was actually losing subscribers in 2002, back when wireless customers were ripe for the picking. The wireless company, which started out as a joint venture of the old SBC and BellSouth, operated on a little-known cellular standard called TDMA that, thanks to its small number of customers worldwide, boasted exactly zero cool handsets.

In 2004 Cingular agreed to acquire AT&T Wireless, another TDMA carrier that was making the transition to the more popular GSM standard. But AT&T started moving customers to the GSM system before it was ready, resulting in dropped calls and poor sound quality. Cingular ended 2004 with the most complaints of any wireless operator in the United States -- about 289 grievances per million customers, according to Consumer's Union, which analyzed Federal Communications Commission data.

Cingular, which is in the process of adopting the AT&T brand, says it has invested $14 billion in the last two years to upgrade its networks, and the company now claims to have the fewest dropped calls of any U.S. wireless operator. CEO Stan Sigman restructured the company to give regional managers more autonomy to match competitors' promotions in their local markets, reversing subscriber losses. Complaints to the FCC fell 77 percent in 16 months.

Thanks to these improvements and its massive customer base -- because of its merger activities, Cingular is largest wireless carrier in the country with 58.7 million customers - the company has become the go-to carrier for a number of cool devices. It was the first to introduce the Motorola (Charts) RAZR in November 2004, and it recently launched Samsung's drooled-over Blackjack and SYNC phones exclusively in the United States.

But its biggest "get" to date unquestionably is the iPhone, set to launch in June. Sigman, a veteran of the Bell System, says he got a call at home from Steve Jobs two years ago; Jobs said he wanted to meet to discuss an idea for a phone. Sigman says Jobs was drawn to Cingular because of its size and its reputation as a good partner to device makers.

It didn't hurt that Sigman was willing to offer Apple (Charts) some special treatment: Cingular signed on to distribute the device without even seeing a prototype of the phone. "I had confidence in Steve that he would deliver on the vision he had," Sigman recalls. Sigman, in turn, sees Jobs' desire to work with Cingular as "an affirmation" of the turnaround the wireless company has executed. (When Sigman finally did see the phone, he says he was duly impressed: "I'm a man of few words, really, and the first time I saw the phone, all I could say was, 'wow.' It is so cool.")

Analysts say the iPhone is sure to boost Cingular sales but say its strongest competitor, Verizon (Charts), doesn't have too much to fear. Not everyone will want -- or can afford at $500 to $600 a pop -- an iPhone (despite what you might read in the tech press), and Apple isn't the only company unveiling cool devices. Look for Verizon, Sprint (Charts) and T-Mobile to start lining up their own exclusives with phones that might appeal to other segments of the phone-buying public.

Cingular, meanwhile, will have to provide pristine customer service and network quality for the iPhone. With a device as highly anticipated -- and hyped -- as Apple's new phone, customers are going to be hypersensitive to their user experiences. It would be a bad time for Cingular to fall back on its old ways. But apparently AT&T is confident enough in the Cingular network that it just announced a new set of calling plans that will allow customers to make or receive calls to other AT&T wireless or wireline phones without incurring additional wireline usage fees or using their wireless minutes.

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