All Articles Tagged subsidies

Interesting take from the Macalope this week with regards to the ongoing confusion and resentment surrounding current iPhone 3G owners and the price they’ll likely have to pay when upgrading to the iPhone 3G S on AT&T. See, the Macalope believes both sides of the debate have it wrong:

[AT&T fronting part of the hardware costs to Apple] isn’t a “subsidy” by the traditional definition. It’s a loan. AT&T is loaning you the money to buy an iPhone and you’re signing a contract to pay it off over the next 18 months. If you decide you want out of your loan, you have to pay a buyout. [...] See, AT&T gets its money one way or the other. Nobody’s “subsidizing” anything.

Even if it is more of a “loan” than a “subsidy”, though, does that make understanding the pricing model easier?

Also worth reading, In typical fashion, the Macalope thoroughly gores PCMag over their WWDC take-away — using ponies, and their reaction to today’s Safari 4 download numbers.

No such thing as a free lunch. You don’t get something for nothing. Yesterday we linked to Gizmodo’s response to iPhone 3G owners “whining” about not getting a second bite at the cheap subsidy pricing for the iPhone 3G S.

Bottom line, you got your discount last year in exchange for a 2 year contract. That contract isn’t done in full yet, so you don’t get a discount in full yet.

But that got me thinking. I asked this on Twitter and am getting mixed reaction, so I’ll ask it here:

What if AT&T offered you full, subsidized pricing anyway ($199/$299) in exchange for another 2 year contract? No, not 2 more years starting now — that still costs them a year — but an additional 2 years after the current contract expires, for 3 years total from iPhone 3G S release.

Here’s the math: 2 year current contract – 1 year completed = 1 year + 2 years new contract = 3 years total.

Sound crazy? Rogers in Canada has all iPhone 3G owners on 3 year contracts already. 3 years are normal in some parts of the world.

However, the idea clearly doesn’t scale, does it? If AT&T offers an iPhone 3G S+ with iPhone 4.0 next year, the same math and model would mean you’d have to sign for a 4 year contract to get subsidy pricing (original 2 years – 1 year + 2 years – 1 year + 2 years = 4 years total).

Sure, it looks nice and linear — matching OS version numbers even — but not it’s not realistic long-term. Who’s going to offer or sign a 6 year contract for iPhone X running 6.0?

Still, for just this year, would you fully re-up it to get the iPhone 3G S at full discount pricing?

AT&T and other carriers subsidize the upfront cost of the iPhone and other smartphones and make up the difference via guaranteed long term contracts/commitments. That’s their business model, but it means they can’t and won’t give repeated subsidies until you’ve finished the associated contract terms. With many iPhone 3G owners — still under contract — eyeing the iPhone 3G S, and the non-subsidized price it brings with it, a fair amount of anger has been plasma-cannoned in AT&T’s monstrous direction.

Gizmodo’s Jesus Diaz, however, gives a nasty spoonful of reality medicine to those of us who bought heavily subsidized iPhones last year, and are upset we can’t get the same subsidy again this year:

The fact is that the $199/$299 price tag for the iPhone is the result of AT&T’s—or any other carrier, since the situation is the same all around the world—subsidy. Without subsidy—and tying you to a new two year contract—the iPhone is not different from something like the Nokia N97, which is $700 unlocked. Or the contract-free, unsubsidized iPhone 3G itself: The iPhone 3G costs $770 and $877 unlocked for the 8 and 16GB versions.

He goes on to kick the telcos heartily in their nether-regions as well, pointing out their exorbitant monthly charges, but takes issue with the sense of “entitlement” in modern consumer culture.

If you don’t like it? His advice is to not buy the new iPhone 3G S and wait until next year when you can get a subsidy.

(I’m locked into a 3 year contract which currently has an early termination fee of ~$500, so I feel that pain…)

And in the mean time?

do the rest of the world a favor and stop whining about what you are entitled to. We don’t live in your pretty me me me ME world.

NB: Delayed MMS deployment and lack of anything approaching information on tethering, however — totally AT&T hate worthy…

[Via Daring Fireball]

The original iPhone 8GB launched with a hefty $599 price tag, though it dropped to $399 a short time later. Though contract details were never disclosed, some pundits and analysts have estimated that AT&T paid Apple up to $15 per month, per customer, in revenue sharing. Over the life of a 24 month contract that would be an additional $360 for a grand total of $959 (later $759) per iPhone!

As both Casey and I have discussed before, the new iPhone 3G 8GB dropped at a super-reduced price of $199, and while again no contract details have been released, it’s universally believed to be carrier subsidized up front.

So, rather than a little bit of money each month for 2 years, Apple is now getting a big chunk right away. How much? The estimates are starting to come in:

[Oppenheimer equity research analyst Yair] Reiner said he also believes that AT&T is paying Apple an extra $100 for each new subscriber to AT&T signed up through Apple’s brick-and-mortar stores, for a total commission of $425. That data point alone suggests that the analyst believes AT&T is also paying Apple the $325 subsidy on phones Apple sells.

If accurate, the iPhone 3G would give Apple a total of $524 per unit if AT&T sells it, and $624 if Apple sells it themselves. Not as much as before, but since its all up front, and economies of scale means they might be producing them at a lower cost (in greater volumes), not to mention the HUGE upside of putting market share ahead of profit, it could still be worth far more to Apple than the previous deal.

Though not the business model some of us expected, it seems Apple is serious in gunning for those low sticker-shock sales.

It should be noted, however, that not everyone is jumping on the $325 number. Scott Bourne argues:

[T]he early termination fee for the iPhone is $175. If the subsidy were $325 – that would be the early termination fee.

[Updated following Phone Different Podcast #19, see below!]

Way back in February, Apple’s Chief Operating Officer, Tim Cook said:

“We’re not married to any business model.”

At the time — and it’s scary how long ago it seems already — the iPhone was only available in the US, UK, Germany, and France, with rumors of Ireland and Austria waiting in the wings. What’s more, these were all exclusive deals, with Apple doing their best to lock the iPhone down to single carriers in each territory in exchange for lucrative — and unprecedented — revenue-sharing deals that some have estimated could be netting Apple up to $15 per month, per subscriber.

So, with a potential billion dollars on the table, while they weren’t married to it, they no doubt felt more than a little lusty.

But in true Apple fashion, invoking perhaps the pirate mantra of old, and embracing the same mindset that has them run iTunes as a near-loss leader, price-cut the iPhone a scant few months in, and offer cheap family upgrade options on their OS and iApps, it looks like Tim Cook was serious.

Read on to find out just how serious he was…

Read the rest of this entry »