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.