Posted by: Stephen Wildstrom on June 11, 2008
The winners and losers from the new iPhone pricing are not necessarily who you might think.
The big winners are both Apple and its greatly enlarged group of carriers. It might seem paradoxical that they can both win, but it works.
Apple gains from an expected surge in market share for the iPhone and the sale of applications through the App Store. The price reductions to $200/300 don’t hurt particularly because the difference will largely be made up by carriers’ subsidy payments
The carriers escape from a no-subsidy, revenue-share model they were never comfortable with and return to a much more familiar model. In the case of AT&T, at least, higher data charges and the end to a monthly revenue-share payment to Apple will at least make up for the subsidy. The costs are upfront and the higher revenues come in the form of an annuity stream, so the new deal will hurt earnings in the short run, but bring in higher profits in the longer term.
Consumers pretty much break even. They pay $200 less up front but, again in the case of U.S. customers and AT&T, the extra $10 a month they pay for data makes it a wash on a net present value basis. Of course, they get a better phone in the deal, and paying $200 feels better than paying $400, even if it all comes out the same in the end.
The big losers may be advocates of open networks. For a brief moment earlier this year, it looked like the market might be moving toward a divorce between devices and network services. Consumers would buy their own devices without subsidies or two-year contract obligations and would buy service separately. There are still forces pushing in this direction, such as the Google-led Open Handset Alliance with its Android phone operating system and Verizon Wireless's open network initiative. But the new iPhone deal is a massive, worldwide reassertions of the subsidized lock-in model. Given the expected popularity of the 3G iPhone, we can be sure that the old way of doing things is not about to disappear.