Apple iPhone 3G Subsidy.

In a previous post, a comment from Rus at FIXYOURTHINKING.com stated that the iPhone was being subsidized by AT&T to get the price drop seen today. Since it seemed the device would be available at $199 anywhere in the U.S. — and according to Steve Jobs will be no more expensive than $199 (U.S.) in all other countries — it didn’t seem to me like a subsidy at all.

However, in wading through post-WWDC Keynote discussions, blog posts and news stories about pricing, plans, etc., the most important data bits come right from AT&T’s own press release (emphasis mine):

The new agreement between Apple and AT&T eliminates the revenue-sharing model under which AT&T shared a portion of monthly service revenue with Apple.

So does this mean Apple no longer gets a piece of the AT&T pie? Yep:

Under the revised agreement, which is consistent with traditional equipment manufacturer-carrier arrangements, there is no revenue sharing

Just how much was Apple getting with revenue sharing anyway? Well, the terms were always confidential, but estimates ranged from a few dollars to $15 a month. A $200 price drop over two years is $8.33 a month, which might just be right.

Obviously, having to fund this price drop has a financial impact on AT&T:

In the near term, AT&T anticipates that the new agreement will likely result in some pressure on margins and earnings, reflecting the costs of subsidized device pricing, which, in turn, is expected to drive increased subscriber volumes.

But don’t feel too sorry for AT&T, they get a nice bonus beyond having a phone that’s now in the price range of millions more people (which is why they opted to subsidize it in the first place): they’ve increased the price of the data plan:

Unlimited iPhone 3G data plans for consumers will be available for $30 a month, in addition to voice plans starting at $39.99 a month.

Unlimited data on the iPhone used to be $20 a month, now it’s $30. This may seem ruthless (and some are already complaining), but in all fairness to AT&T they did spend billions upgrading their 3G equipment, and their smartphone data plans for, say, the BlackBerry are already $30 a month. They’re really just bringing the “grown up” iPhone in line with that. I’m sure AT&T will be excoriated, but I don’t think they’re crossing any line here.

Bottom line, though, is that over the two-year contract the iPhone 3G actually costs $40 more than the old one. Of course, you get the faster speed, the built-in GPS, better battery life, (hopefully) better audio, and a flush headphone jack. And you have to pony up $200 less up front, which is what most people seemed to complain about (well, until today).

What had tripped me up on this whole thing was that it seemed like a strange subsidy, since I didn’t think there was any verification on AT&T’s part. It appeared you got the iPhone for $199 no matter where you bought it, in which case it’s not really a subsidy at all. But I’ve learned two things that have cleared that up for me:

  • The iPhone will no longer be sold online. In the U.S. you have to go to an AT&T or Apple store.
  • While the press release is mum on the issue, it’s reported that on the AT&T conference call they said that in either store the phone would have to be activated in-store to qualify for the $199 price.

These items combine to make this a “classic” phone subsidy. It also means we can kiss home activation goodbye. Considering how revolutionary that was, and how it helped break the mold of the old-guard carrier model, I think that’s a shame. Sill, AT&T is coughing up $200 per phone; that obviously buys it the right to dictate some new terms.

Finally, I assume the carriers in other countries are subsidizing it, too, and will likely do so along the same lines.

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10 thoughts on “Apple iPhone 3G Subsidy.

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  2. Reg hits the nail on the head. Apple is using the same methods that kept the iPod out in front of the competition. Keep moving the target! I predict that when Apple has cost reduced the iPhone hardware, they will sell it at $99 available on any carrier.

  3. I’m in Canada and I’ll wait and see what happens with iPhone pricing for next month when they actually release details.

    As to strategies, Apple has released a technological product that has devastated the plans of the other handset makers, making them scramble to catch up to Apple, made Apple into the perceived front-runner and put the other carriers in a mindset for a different direction with the release of the original iPhone. With the success of the original iPhone, you had other handset makers planning on selling higher cost phones and now Apple has upset the cart all over again in going back to carrier subsidized rates.

    Imagine you are one of the other handset makers. They now have to rework everything they’ve done in thinking that they could sell their products one way and have to rework the marketing to go back. This is in addition to reworking the technology to try to catch the perceived technological leadership of Apple in cell phones. I say perceived as I haven’t played with an iPhone yet and have heard many things good and bad about iPhones compared to the competition.

    Will I get one when an iPhone is available? Not sure. Depends on costs. I dropped my Bell cell last year in anticipation of getting an iPhone, so I have no contract to eliminate.

  4. @ Tom and @ Disappointed

    I understand the reasoning behind the moves and so forth. I guess I am just extra disappointed because living in Canada I will be paying a ridiculous amount for a service that doesn’t really cost the carrier a fraction of what they charge. The sheer immorality of the set-up is hard to deal with. It’s like you have to walk in to one of the worst customer-hating businesses imaginable, bite your tongue and ask pretty please for something that should by all rights be simply available to purchase from Apple.

    In fact, as much as I love Apple and have followed them all these years and also been waiting for the iPhone for a year and a half, I probably won’t be able to bring myself to do this. This usually moral, rule-following person will be looking into “other” ways to get an iPhone now (if they are still possible), even though I patiently avoided that for a year while all my friends gleefully obtained and “jailbroke” their 1.0 iPhones waiting for an authorised iPhone.

    It’s also a bit more disappointing in terms of the future of the cell market, in that without something else happening, the pressure to lower contract prices from the ridiculous rates they are now (even in the USA), is gone. I can’t see why the carriers would ever change their ways without some kind of market pressure, and that simply can’t exist under the “classic model” of cell phone distribution in markets with only one (effective) carrier.

    Ironically, in the 3rd world and Europe, competition will give better results. In North America I fear that we have just been thrown under the wheels of the monopoly bus.

  5. re: rescinding home activation.

    i think you can squarely lay the blame for this on the unlocking importers around the world. This badly affected both apple and at&t. Apple’s profit margin on each unlocked iphone was seriously minimised (perhaps all the unit profit?) and at&t’s supposed exclusivity was debunked and devalued, meaning they did not reach the full potential of switching customers.

    so why i liked the idea of home activation this was just a necessary business decision. And Tom is right apple still did break the mould on many other manufacturer/carrier issues.

  6. Without the revenue sharing, I also think they’ll be able to easily branch out to other carriers. Plus, they get all their money up-front, which is a win for them. Seems like the old revenue sharing method would have been better for AT&T, so maybe Apple precipitated this new system?

  7. @Rus,

    I agree. SInce a non-activated iPhone will likely be $499, the value of the first gen models (and iPod touch) has not been hit as hard as I had first thought.

    @Jeremy and @ Disappointed,

    I have really mixed feelings about this. On the one hand I agree with you completely that this game-changing move has now been rescinded. I imagine that somewhere the hardware makers are silently crying, while carriers everywhere are cheering.

    But on the other hand, one could argue that its purpose has already been served. After all, Apple got to build the phone in isolation, with no input from AT&T. They got to build the phone they wanted, complete with its ability to load your own ringtones, music, etc. and not have to grovel to the carrier for all those alleged “extras” at exorbitant prices. And none of that has changed. It’s not like they pulled features to satisfy the subsidy. Meanwhile, it’s hard to argue with a $200 price drop, especially in the face of the iPhone’s competition.

    Sometimes practical realities have to win out over emotion. Still, even knowing this my feelings are mixed…

  8. @Jeremy –

    I hear you. It’s unfortunate, Apple tried to change the model but failed. And now they’re locked in an embrace with the Devil. They should have released the iPhone unlocked last year, I bet Jobs regrets getting in bed with AT&T now.

  9. To me, it’s more than just “a shame” that Apple has gone back to the old carrier method, it’s a tragedy. This signals that Apple has entered the “shovelware” market and virtually abandoned it’s customers. In the US everyone gets a better phone and they secretly pay a tiny bit more (most won’t even realise it), but outside of the AT&T contract Apple has basically given the carriers carte blanche with the price.

    By allowing the old carrier based model to triumph they are guaranteeing that people like myself (in Canada) will be paying whatever the carrier wants for the iPhone. If Rogers doesn’t have to change it’s price for wireless it simply won’t. i.e. – iPhone in Canada is likely to be very expensive indeed.

    Never thought I’d see the day that Apple would simply abandon it’s customers in favour of volume sales of a cheap plastic phone. Shocking IMO.

  10. I was told a few days ago that the phones were going to be available without contract for an unsubsidized price of $499 and $599. I think this is how it will be in some countries outside the US where they do not allow contract locking.

    So Tom, your old phone may be worth something after all – know that the CPU did not change – so power is the same. Also know that in many areas EDGE is already faster and getting faster by about 20% most everywhere by the end of the year.

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