Because many cell towers are in close proximity to each other. The transmission level of each channel is set by the phone it is connected to per it's reported signal strength. This allows the same channels to be used by each tower simultaneously allowing more concurrent calls. If the iPhone is reporting a higher than real signal strength because of the bug, it would cause the transmitter at the tower to send a lower level signal thus causing increased dropped calls.
Upon investigation, we were stunned to find that the formula we use to calculate how many bars of signal strength to display is totally wrong. Our formula, in many instances, mistakenly displays 2 more bars than it should for a given signal strength. For example, we sometimes display 4 bars when we should be displaying as few as 2 bars. Users observing a drop of several bars when they grip their iPhone in a certain way are most likely in an area with very weak signal strength, but they don't know it because we are erroneously displaying 4 or 5 bars. Their big drop in bars is because their high bars were never real in the first place.
To fix this, we are adopting AT&T's recently recommended formula for calculating how many bars to display for a given signal strength. The real signal strength remains the same, but the iPhone's bars will report it far more accurately, providing users a much better indication of the reception they will get in a given area. We are also making bars 1, 2 and 3 a bit taller so they will be easier to see.
We will issue a free software update within a few weeks that incorporates the corrected formula. Since this mistake has been present since the original iPhone, this software update will also be available for the iPhone 3GS and iPhone 3G.
So does this mean that it's just the display that's wrong, so people who are experiencing dropped calls will still get dropped calls regardless. The death grip will just drop the signal from 2-3 bars to zero now? i'm confused!
Apple Press Release Translation: Yeah, it's just a calculation issue with displaying the bars... The dropped calls are just your imagination and/or AT&T's problem.
My guess is the algo they use to calulate the bars used may stop the dropped calls as well depending if the number of bars calculated is linked to the connection. e.g. the logic could be "if the number of bars = 0 then drop the call"