If you find this metric as astonishing as I do, consider this: The increase in Bay Area data traffic is actually below the national average–significantly below. According to AT&T (T) CTO John Donovan, 3G data traffic on the company’s wireless network has risen nearly 5,000 percent in the past 12 quarters nationally (see chart below; click to enlarge).

“Today, we’re seeing unprecedented growth in mobile broadband traffic,” Donovan said during his keynote at the Open Mobile Conference on Nov. 5. “This growth has required extensive rethinking of wireless networks as we know them, as well as significant advances in the supporting IP backbone and other infrastructure.”

A 5,000 percent increase in 3G data traffic: That’s an astonishing figure. Seems to me it’s entirely likely that any carrier that had been first with the iPhone–including catcalling rival Verizon (VZ)–would have suffered network troubles similar to those that plague AT&T today.

No other U.S. carrier offers a super-smartphone that has sold as well as the iPhone and that people use much like a laptop. Sure, Android and Palm (PALM) webOS devices are used in this way as well, but there are far fewer of them and they have significantly fewer data-hungry apps.

Research in Motion (RIMM) offers some BlackBerries that are used this way, but only some, and there are only 3,000 or so apps available for them. iPhone owners have 100,000 apps from which to choose. And while it’s obvious that there are more BlackBerries in use than iPhones, some of these rely on AT&T’s network, which only compounds the carrier’s problems.

So, really, any carrier that had been first to market with the iPhone would have seen its network overtaxed, especially after Apple (AAPL) launched the iPhone 3G and the iTunes App Store. Those events effectively upended traditional planning models for network capacity in a way that no one was prepared for.

Perhaps other carriers would have fared a bit better. Verizon’s 3G network, even back in 2007, was much deeper and broader than AT&T’s. But could it really have supported a 5,000 percent increase in data traffic without incident? I’m not so sure.

Which is not to say that AT&T is blameless. Its network has lagged and continues to do so, and the iPhone and the massive surge in data traffic it brought with it are not entirely responsible for that.

But they are obviously a big factor. It will be interesting, then, to see how Verizon’s network holds up in comparison if and when the carrier gets the iPhone.

[Image Credit: Morgan Stanley Managing Director Mary Meeker]

Make no mistake, that surge has been massive. Says AT&T (T): “Since 2008 AT&T’s network in the San Francisco area has experienced a 3G data traffic increase of 2,000 percent.”

Wow. No wonder my calls kept dropping at that last Apple (AAPL) event in San Francisco (yes, an iPhone 3G repeatedly dropping calls at Apple’s Sept. invitation-only music gathering). In any event, the upgrade, which includes the bolstering of backbone infrastructure, should result in better coverage, 3G performance and in-building penetration.

“More than ever before, customers look to wireless communications to stay in touch with family, friends and business colleagues,” said Terry Stenzel, AT&T vice president and general manager for Northern California/Reno. “The additional spectrum helps to enhance the 3G network so that our customers have the best experience when they make a call, check an e-mail, download a video or song, access applications or surf the Internet on their AT&T device.”

All of the new commercials are Christmas-themed and all feature Apple’s (AAPL) iPhone, though they are careful to leave it unscathed by Verizon’s criticism of AT&T (T). The standout among the three, this re-creation of the “Island of Misfit Toys” scene from the 1964 Rankin/Bass stop-motion animated Christmas television special, “Rudolph the Red-Nosed Reindeer.” Note that the conceit of the ad is that iPhone has been banished to the Island of Misfit Toys not because of its quality but because of of AT&T’s 3G network.

A pretty brilliant escalation of Verizon’s marketing battle with AT&T and one that suggests through its deference to the iPhone that there may be more to these Verizon iPhone rumors than previously thought.

Below, Verizon’s other two ads.

“Demand for converged mobile devices has remained strong all year,” said IDC analyst Ramon Llamas. Driving that demand: Nokia (NOK), which maintained its position as the overall leader in the converged mobile device market, Research In Motion (RIMM), whose BlackBerry made some significant share gains internationally, and Apple (AAPL) and the iPhone, whose share of the smart-phone market rose to 17.1 percent from 16.6 percent in the previous quarter (see table below; click to enlarge).

“Apple reached its highest volume yet in a single quarter,” Llamas said. “The nearly global availability of the iPhone 3GS sparked another round of annual replacements for Apple loyalists, while the lower price on the iPhone 3G put the device well within reach of customers wary of the price. Although the iPhone has struggled within emerging markets, its arrival at China Unicom this year could foreshadow greater shipment volumes.”

[Image credit: AMUSEMENT]

“Verizon is displaying maps of the United States that purport to show each carrier’s ‘3G’ coverage. The maps use color to depict the areas of the country in which each carrier has ‘3G’ coverage and blank or white space in the areas of the country where ‘3G’ coverage is not available. Consumers are interpreting the white or blank space on the maps to mean that AT&T customers who are not in an AT&T ‘3G’ coverage area have no wireless coverage whatsoever, and therefore have no ability to use their wireless devices for any purposes in vast areas of the country. This interpretation is not surprising as Verizon, in its own coverage maps, uses white space to inform customers that no coverage of any kind exists. Contrary to the misleading message conveyed by Verizon’s advertisements, AT&T customers can fully use their wireless devices outside of a ‘3G’ coverage area and undisputedly have coverage in areas depicted by the white or blank spaces on the maps used in Verizon’s advertisements.”

– Excerpt from AT&T’s complaint against Verizon

If AT&T’s lawsuit over Verizon’s allegedly misleading “there’s a map for that” wasn’t a public relations mistake to begin with, it will be by the time Verizon gets through with it. Responding to the suit today, Verizon (VZ) rep Jeffrey Nelson used it to stoke public perception that AT&T’s (T) network is inferior to Verizon’s.

“This is a junk lawsuit. It has no merit,” Nelson told Adweek. “It’s surprising that rather than defend the ‘blue’ hot spots on their 3G map, our competitor instead focuses on their white spaces. The maps clearly note that the comparisons are of 3G service, and further note that voice and data services are available in other places.”

Way to draw attention away from Verizon’s claim of a superior network coverage, AT&T.

There is “no sign of the sort of sellout reception that greeted the smart phone at its introduction in other countries,” The Wall Street Journal reported, adding that there were no lines for the iPhone at the Apple store in Beijing, the company’s only location in China.

Sounds like a lackluster launch, and with Apple (AAPL) and China Unicom, the only carrier authorized to sell the device in the country, declining to disclose sales figures, it’s difficult to argue that it was otherwise. It clearly wasn’t the rousing success to which we’ve become accustomed. That said, it probably wasn’t quite the bust it’s been made out to be, either.

Why? Well, consider this: There were launch ceremonies in 30 provinces. To date, we’ve heard anecdotal reports from–as best I can tell–one of them. And while it’s admittedly concerning to learn that a China Unicom store in Beijing sold just 10 iPhones last Saturday, that’s just one store. The device was on sale in many, many others (1000, according to Apple COO Tim Cook) across 30 provinces and 285 Chinese cities in a nation with 710 million mobile-phone subscribers.

Finally, while it’s true that the prices Apple and China Unicom are charging for the iPhone are heady, they’re not quite as bad as we’ve been led to believe. “I think the western media has misconstrued the iPhone pricing in China,” Dan Butterfield, editor of iPhonAsia told me.

“Nine out of 10 reports that I’ve seen have simply repeated the ‘too expensive’ mantra,” Butterfield explained. “They then quote the contract free price point–4,999 yuan ($730) to 6,999 yuan ($1,025) for the iPhone 3GS. They argue that you can buy a gray-market iPhone cheaper and it has WiFi….The truth…the gray-market price is marginally cheaper for those who want to go ‘prepaid.’ But when you examine the full matrix of China Unicom price/plans, you quickly realize that you can save big by going on contract vs. prepaid (pay as you go). There are even four price/plans where your iPhone if free. The iPhone subsidy increases for those who opt for more expensive monthly plans.”

Butterfield elaborates: “Moreover, if you want to access ‘3G,’ there is no good carrier option other than China Unicom. You can run at 2G speeds on China Mobile or China Telecom. But neither of these two networks support the chipset in iPhone. China Mobile runs TDSCDMA 3G and China Telecom runs CDMA2000 3G. So you are left with China Unicom’s WCDMA 3G–a world-standard 3G protocol fully supported by iPhone 3G/3GS. Why not go on contract and get a subsidized iPhone that is well below the ‘too expensive’ (contract free) prices that the media is shouting about?”

And in the end, does it even matter? As Butterfield noted, an iPhone sale is an iPhone sale–whether it’s made by a gray-market vendor or an authorized one. And either way, it’s good for Apple.

So was the iPhone’s launch in China really a bust? “Probably not,” said Butterfield. “Was it a rousing success? Probably not. The truth is somewhere in the middle.”

UPDATE: Well what do you know: China Unicom just coughed up some first weekend sales numbers for the iPhone and … well, they’re not much to look. The carrier sold just 5,000.

Today, the Finnish cellphone giant, which has been struggling to develop a worthy competitor to the iPhone, filed suit against Apple, claiming the popular smart phone infringes upon a number of Nokia patents.

Specifically at issue here: 10 patents covering various wireless data, speech coding, security and encryption technologies. Nokia claims that every iPhone model shipped since 2007 has violated them.

“The basic principle in the mobile industry is that those companies who contribute in technology development to establish standards create intellectual property, which others then need to compensate for,” said Ilkka Rahnasto, vice president of legal & intellectual property at Nokia (NOK). “Apple is also expected to follow this principle. By refusing to agree appropriate terms for Nokia’s intellectual property, Apple is attempting to get a free ride on the back of Nokia’s innovation.”

To that point, Nokia says it has entered into license agreements with about 40 companies for these patents. Only Apple (AAPL) has refused. The obvious endgame here, then, is to force the iPhone maker to change its mind.

“We believe that Nokia is not seeking an injunction; rather, we believe that the company has been in talks with Apple concerning a patent royalty payment for over a year,” Piper Jaffray analyst Gene Munster said in a bulletin to clients. “With today’s announcement, it appears that the companies have not come to a resolution and Nokia is attempting to hasten the process. Nokia is likely looking to obtain a patent royalty of 1-2 percent ($6 to $12) on every iPhone sold in compensation for its IPs concerning GSM, 3G and WiFi technologies on mobile devices.”

Interesting that news of the suit comes just days after Apple announced its most successful financial quarter ever at a time when Nokia is posting nasty losses.

I’ve asked Apple for comment and will update here if I’m offered one.

Though the carrier’s decision to allow Internet telephony apps on its 3G network has lead some to speculate that the company will soon allow data tethering as well, that’s not the case. Evidently, there’s still a while to wait until AT&T (T) supports that long-promised feature, which it fears might exponentially increase network traffic and undermine sales of air cards.

Asked if AT&T’s new policy on Internet telephony apps heralded the arrival of iPhone tethering, a company spokesman repeated the same tired line we’ve been hearing for months now: “Whenever we offer new features, we want to offer the best possible customer experience. For tethering, we need to do some additional fine tuning to our systems and networks so that we do deliver a great experience.

And perhaps that’s for the best given the widespread complaints over the quality of AT&T’s network prior to iPhone tethering. If it’s as poor as some claim now, how poor might it be when Apple’s (AAPL) iPhone users begin tethering their MacBooks to it?

“We are very happy that AT&T is now supporting VOIP applications,” said Apple (AAPL) spokeswoman Natalie Kerris. “We will be amending our developer agreements to get VOIP apps on the App Store and in customers’ hands as soon as possible.”

But the new policy hasn’t gone over well with AT&T investors. Shares in the company slipped on the news yesterday and they’re falling still further today. AT&T (T) is trading at $26.21 as I write, down more than two percent from its open. Why? Perhaps due to concerns that the carrier might take a revenue hit when iPhone owners who are using telephony services to make cheap calls switch to low-minute voice plans.

As JP Morgan analyst Mike McCormack notes, voice accounts for $50-$60 of the $95 in monthly revenue generated by the typical iPhone user. If the average user were to drop AT&T’s unlimited voice plan ($99.99/month) in favor of its cheapest ($39.99/month), the carrier could lose upward of 20 percent of voice revenue.

That’s an ugly drop. And while AT&T might offset it by raising its data plan rates, doing so would inevitably outrage customers who are already giving it hell for poor coverage and lousy call quality.

“iPhone is an innovative device that dramatically changed the game in wireless when it was introduced just two years ago,” AT&T Mobility and Consumer Markets chief Ralph de la Vega said in a statement. “Today’s decision was made after evaluating our customers’ expectations and use of the device compared to dozens of others we offer.”

It was also doubtless made after evaluating Verizon’s (VZ) announcement this morning that it will begin offering phones running Google’s (GOOG) Android OS and its Google Voice app in a matter of weeks. I’m sure that Federal Communications Commission investigation was “evaluated” as well.

Anyway, good news for consumers–assuming AT&T’s network can handle the additional strain, which is anything but a sure thing at this point.

UPDATE: The VoIP community was quick to congratulate AT&T for the move. “All of us at Skype applaud today’s announcement by AT&T (in an FCC filing to be published shortly) that it’ll open up its 3G network to Internet calling applications such as Skype,” Skype CEO Josh Silverman wrote in a post to the company blog. “It’s the right step for AT&T, Apple, millions of mobile Skype users and the Internet itself. Nonetheless, the positive actions of one company are no substitute for a government policy that protects openness and benefits consumers. We’re all looking forward to further developments that will let people use Skype on any device, on any network.”

That’s the cheeky slogan of a new Verizon ad reportedly set to debut during tonight’s “Monday Night Football” game. Riffing on the tagline from Apple’s iPhone commercials, it essentially turns widespread complaints about the quality, coverage and speed of AT&T’s network into a Verizon marketing campaign–if it wasn’t that already. “Browse the Web and download music and apps, at 3G speed, in five times more places than the nation’s number two wireless carrier,” the ad suggests. “Before you pick a phone, pick a network.”

Quite the sucker punch from Verizon, and a well-timed one too. AT&T’s iPhone exclusivity deal is set to expire sometime next year. And recent reports suggest that Apple, by signing on Verizon as a second carrier partner, could double U.S. iPhone sales in the near term. Verizon (VZ) pointing a mocking finger at AT&T (T) in an ad like this certainly isn’t going to do anything to make AT&T’s negotiations with Apple (AAPL) go any more smoothly.

UPDATE:

Here’s the ad:

[Image Credit: TechFlash]

“Speculation is rife that Apple will end its exclusive U.S. iPhone service deal with AT&T when the current contract expires in June 2010 and begin to offer phones that work with the Verizon network,” iSuppli analyst Francis Sideco said in a research note today. “However, iSuppli doesn’t believe this will be the case. The main reason Apple is likely to stick with AT&T beyond 2010 is the relatively wide usage and growth expected for the HSPA air standard used by the carrier for 3G data.”

As Sideco explains, “Cumulative global subscribers of HSPA wireless services, consisting of High-Speed Downlink Packet Access (HSDPA) and High-Speed Uplink Packet Access (HSUPA), are set to rise to 1.4 billion in 2012, up from 269.1 million in 2009. In contrast, cumulative subscribers for the EVDO standard used by Verizon will amount to 304.6 million in 2013, up from 145.2 million in 2009.”

A point worth noting, though it’s hard to imagine that Apple (AAPL) doesn’t harbor some resentment toward AT&T (T), which has undermined its carefully crafted iPhone experience. And if that’s the case, wouldn’t it make more sense for the company to extend its deal with AT&T, but not as an exclusive? That would allow Apple to hammer out a second deal with Verizon (VZ), which, according to some analysts, would more than double U.S. iPhone sales in the near term.

As Bernstein Research analyst Toni Sacconaghi noted this summer, “Verizon’s postpaid subscriber base is not only larger than AT&T’s, but more importantly, is untapped whereas we estimate more than 10 percent of AT&T’s postpaid users already have an iPhone.”

Evidently, AT&T has finished “finalizing” those very important “internal system upgrades” that prevented the company from supporting the feature at the outset like virtually every other carrier, a delay that made it the laughing stock of Macworld earlier this year.

AT&T (T) had repeatedly insisted that MMS capability would be available by the end of summer. By debuting the service on Sept. 25, it’s launching it three days into fall. But, whatever. At least, AT&T is launching it.

MMS will be available at no extra charge to iPhone users who already have a text-messaging subscription from AT&T and own a 3G or 3GS iPhone. It will be enabled by a software update on Sept. 25.

The official release, below:

An Update on iPhone MMS for our Mobility Customers
We know many of our iPhone customers are eager for an update on our rollout schedule for Multimedia Messaging Service (MMS). We’ve been working for the past several months to prepare our systems and network to ensure the best possible experience with MMS when it launches–and that launch date is: September 25 for iPhone 3G and 3GS customers. MMS will be enabled through a software update on that day.
We know that iPhone users will embrace MMS. The unique capabilities and high usage of the iPhone’s multimedia capabilities required us to work on our network MMS architecture to carry the expected record volumes of MMS traffic and ensure an excellent experience from Day One. We appreciate your patience as we work toward that end.
We’re riding the leading edge of smartphone growth that’s resulted in an explosion of traffic over the AT&T network. Wireless use on our network has grown an average of 350 percent year-over-year for the past two years, and is projected to continue at a rapid pace in 2009 and beyond. The volume of smartphone data traffic the AT&T network is handling is unmatched in the wireless industry. We want you to know that we’re working relentlessly to innovate and invest in our network to anticipate this growth in usage and to stay ahead of the anticipated growth in data demand, new devices and applications for years to come.
We thank you for your business and look forward to keeping you updated on our initiatives.