The Flip Side of a Subsidized iPhone

Posted by: Olga Kharif on June 10, 2008

Yesterday, Apple announced that AT&T will start subsidizing its iPhone device, making it available for as little as $199 for an 8 Gigabyte model. Previously, users have had to pay full price for it, which is why many consumers are sure to applaud the decision. By offering a subsidy of an estimated $350 per unit for the device, AT&T will likely see its iPhone sales double, estimates Craig Moffett, an analyst with Sanford C. Bernstein. So it’s a win-win for consumers, right? Not necessarily.

As Moffett points out in his research note this morning, chances are, AT&T, which previously used to pay Apple a share of iPhone-related revenues every month, is simply paying the same subsidy upfront. Consumers will likely end up paying the same amount through higher phone service bills through the life of their wireless contract. What’s more, the move does not bode well for the movement to open up U.S. wireless networks. As Moffett notes, “The core issue is….the philosophy of subsidies. Returning to the old and familiar subsidy model undermines progress towards an open network future where customers, not carriers, pay for devices.”

When consumers pay for the devices up front — as they do in Europe — carriers have to allow them to take these devices to other carriers when switching. Such “unlocked” devices, untethered to a particular network, help increase market competition and, at the end, may (but don’t always) result in more competitive rates. AT&T’s new subsidies move, in effect, takes the open movement one step back.

Reader Comments

Lee

June 10, 2008 7:16 PM

but our government taught us NOT to save up money to buy something we want later, just borrow and buy it now.

Borrow from the Chinese, AT&T, whoever will subsidize your purchase.

Glenn

June 11, 2008 10:03 AM

The cellphone companies will never make anything easy on the consumers. They prime objective will always be to make a buck on suckers for new toys.

Chris Parente

June 12, 2008 9:05 AM

Agreed, not good in the long run. AT&T may feel they have to do this to justify a locked device.

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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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