By Jon Fortt
November 19, 2008
AT&T has reaped benefits from its exclusive deal to carry Apple’s iPhone. But what happens when the deal expires? Image: Apple

It’s the catch in every Cinderella story: Eventually the clock strikes midnight, and that opulent carriage turns into a pumpkin.

For AT&T’s

iPhone sales, the witching hour could be two or three years away – executives won’t say exactly when their exclusive contract with Apple

runs out. But when it does, they know they will lose a valuable competitive advantage. Even now, AT&T executives and engineers are working on new technology initiatives to help the company thrive with or without its not-so-secret weapon.

Certainly the iPhone has turned the carrier into the belle of the ball. In the year-plus since AT&T took a risk and gave Apple unprecedented leeway to craft and release a phone with minimal carrier input, the iPhone has helped the telecommunications company to burnish its brand, weaken its rivals and position itself as a leader in the digital age. The iPhone is so valuable to AT&T that the company willingly took a $900 million hit to its profits last quarter to subsidize new iPhone 3G subscribers.

This move wasn’t charity; iPhone owners spend more on voice and data plans, and are also more likely to line AT&T’s pockets by adopting other services like high-speed Internet access and digital TV. That gives AT&T execs confidence that they’ll make the subsidy money back from iPhone customers (and then some), after just a few months. Roughly 4 in 10 of last quarter’s iPhone users were new to AT&T, which means they probably defected from Sprint

, T-Mobile

or Verizon Wireless

. Also, those new subscribers helped boost data revenues by more than 50%. If you can help yourself and hurt your competition at the same time, well, that’s a good thing.

But back to the matter of that witching hour: What’s AT&T gonna do when every other U.S. carrier can sell the iPhone too? During a visit to San Francisco earlier this month, AT&T Mobility CEO Ralph de la Vega offered some insights.

Yes, he knows he can’t afford to just sit back and sell iPhones, rub his hands together and wait for the money to roll in. And he knows that if AT&T wants to maintain its budding reputation as a technology leader, his team needs to get moving. One example of how he hopes to do it: A project in AT&T’s labs that lets iPhone users send video to their flat-screen TVs by swiping their fingers across the iPhone’s screen, as if to flick the video across the room.

Sounds great. When can we see it? As soon as engineers get the software good enough to work on a large scale. “I realize this is something we need to get done,” he said. “I can’t get the stuff out of the labs fast enough.”

Meanwhile, AT&T is also working on improving its customers’ mobile Internet experience, to give them a reason not to switch to a competitor. To speed up Web browsing and take pressure off of its network, for instance, AT&T announced this month that it will buy Wi-Fi provider Wayport for $275 million. De la Vega said that once AT&T links its systems up with Wayport’s, high-end, Wi-Fi-enabled smartphones like the iPhone and BlackBerry

will automatically jump onto the network when a person is in range for fast, free access in places like hotels, airports and McDonald’s restaurants. And there are other software projects in the works that should challenge the world’s assumptions about what AT&T can do. “I think within a year you’ll see something,” he said.

All of which sounds good — but remember, carriers like AT&T aren’t known for succeeding at this sort of thing. Before the iPhone came along, Silicon Valley companies like Handspring (PALM) had a hard time convincing the major U.S. carriers to let them try anything too bold. Can AT&T change the carrier world’s reputation from laggard to leader?

Perhaps that’s what a Cinderella story is all about. We’ll see if AT&T can write itself a happy ending. (GOOG) (MSFT) (MOT) (NOK)

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