3G iPhone Pricing: Winners and Losers

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.

Reader Comments

hieutran

June 12, 2008 3:48 AM

I want an iphone with what price..?
It is 16g.Would u send email to me,please.
Thanh u so much.

Mobile Phone Shop Uk

June 12, 2008 5:09 AM

Nice Posting. Apple iPhone is the best technology for mobile phone. There is one "app" that I would like to see on the iPhone... it's called Flash. Ever heard of it.

For more information Apple iPhone 16GB Please visit our site http://www.mobilephoneshopuk.net/apple_iphone_16gb.html

Bacillus

June 12, 2008 10:13 AM

The root cause of changed business models is the swirl of unlocked iPhones that made (countrywise) exclusivity obsolete. The contract between Apple and ATT simply didn't work. Kick-back revenue sharing with a hardware supplier is at the very core of what any operator (ATT) would detest.
Apple with its 10m target (that it never made) was in a hurry.

The situation could only be resolved in a manner that would benefit both parties. So now telco's keep their revenue and Apple its business by adopting the regular telco subsidisation of hardware. Abandoning exclusivity and perceived "lower" prices means that all can expand their business by expanding overall volume.

That said, it is nonsense that customers pretty much "break-even". Most will use their 3G broadband in a manner that will significantly drive up monthly fees.
That will drive the subsidisation of a 3G iPhone which is just as expensive as it was.
Some call that "reality distortion", some smart business from the part of Steve Jobs. It is probably both.

Strider

June 12, 2008 10:56 AM

I disagree that the $10/month additional data charge is merely covering the additional subsidy provided to Apple. I'm sure AT&T is going to be paying itself back for its new 3G network upgrades for a while. Also, I imagine the some of that $10 bucks is going to cover the exponential increase in data usage over the network: I seriously doubt folks are going to spend alot of time trying to connect to local wireless 802.11 networks when the data will be available to load, almost as quickly, from the 3G mothership. I bet data usage skyrockets. If I was AT&T, i'd charge per kb, period. This $30 all-you-can-eat is sure to promote abuse of the network as folks try to get their fill.

Ben

June 12, 2008 11:43 AM

ATT is going to be making bank on this phone. As mentioned in the article, the increased plan prices more than offset the upfront subsidy they will pay to Apple at the sale, but then they also don't have to provide revenue sharing anymore. I was a bit surprised by this new arrangement. I know it is the "norm" in the cell phone industry and it is good for Apple and AT&T, but Apple has built its reputation on looking out for the consumer, and with this update it seems their relying on 3rd-party application development to appease consumers. Oh yeah, and the faster 3G services. . . if you live in one of AT&T's major markets. Otherwise, you're paying more for not much different of a phone than the original.

chris

June 12, 2008 2:42 PM

Thank you for looking at the cost on a NPV basis. This is the first piece I've seen do the analysis the right way.

jjb

June 12, 2008 3:26 PM

Small comment re: "Most will use their 3G broadband in a manner that will significantly drive up monthly fees."

The data plan w/ iPhone has unlimited internet/data usage.

I also think it's funny that so many journalists think they're on to something by talking about the "data fee" and how the fee + the phone will still make it all pricey in the end... Any smartphone requires you get a data plan: sidekick, blackberry, palm, iphone - it just kills me that every tech reporter out there thinks they've hit on something with this.

Iphone Sucks!

June 12, 2008 10:36 PM

Give me a break Iphone is not a great device. All I see in this Iphone is good looking device that's all the hype is about. It is just a personal phone and not a business phone. My Windows Mobile Smartphone can beat the features what the Iphone has. My Windows Mobile Smartphone is great use for personal and business use. Funny how Iphone upgrade now includes 3G and Gps ha ha too slow for them to relize many Smartphones already have these features for 2yrs ago. Again Iphone wants to compete against BB? ha ha what wrong Iphone you gave up compete against Windows Mobile Smartphone. Again Iphone just looks good looking is all what I see in this phone.

NotAnIphoneOwner

June 13, 2008 12:34 AM

Well, the 30 all you can eat data stream will be intriguing, but I don't know if I will leap on this boat yet.

Still, it's pretty.

And I find it funny Iphonesucks! that your Smartphone can't improve your spelling. Is that an app they are working on?

Soon to be Iphone User

June 13, 2008 10:00 AM

Iphone Sucks poster must work for Microsoft. Windows Mobile runs on many products and not well at on any of them. I know I am have to sell the stuff all the time it’s never ending issues with the software. The only good thing to say about it is that is better the other great OS call Vista. I am very much looking forward to purchasing the new iPhone. The one issue I do have with it is that it works only on AT&T network.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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