New iPhone Pricing Model Is a Step Backward for Consumers

By Laura M. Holson
$199 iPhone(Credit: Eric Risberg/Associated Press)

Of all the research reports written about the debut of Apple’s new $199 iPhone this week, one written by Craig Moffett of Sanford C. Bernstein was particularly notable: He warned that the cheaper iPhone is really a step back, not a step forward, for open networks.

In recent months, wireless carriers like AT&T and Verizon Wireless have made much of the notion that they are willing to embrace a more open attitude toward consumers, promising to allow them to buy full-priced mobile phones and use them on the network of their choosing. But AT&T’s decision to subsidize the iPhone but require customers to sign a two-year contract “undermines progress towards an open network future,” wrote Mr. Moffett.

In a business model where phones are subsidized, customers are locked into long-term contracts and subject to stiff penalties if they decide to switch carriers. (Wireless carriers maintain that contracts and termination fees are essential to help defray the cost of the subsidized phones.) Wireless carriers also spend billions of dollars to maintain large numbers of stores to sell phones sold solely for use on their networks. Those costs, too, are factored into the price of plans, analysts say.

Analysts estimate that AT&T will pay Apple at least a couple of hundred dollars more an iPhone than it will charge customers, according to Bloomberg News. To offset that subsidy, AT&T’s consumer data plans for the new iPhone will cost $10 extra a month than for the unsubsidized, first-generation iPhone, which is available for as low as $399. The new iPhone’s contract terms are also less forgiving if consumers want to upgrade to a next-generation iPhone before their contracts end.

“Like promotions and discounts in so many industries, the short-term revenue and share boost of the old and familiar subsidy model is like a drug,” wrote Mr. Moffett. “The downside is that we are now right back where we were before, in a world where customers expect carriers to underwrite device costs, and where carriers therefore maintain the high costs of retailing as well as network operations.”

Despite the new-era hype, Mr. Moffett wrote, “the philosophy of the new iPhone is ‘business as usual.'”

Comments are no longer being accepted.

Mark U. June 11, 2008 · 9:34 am

SMS messaging is no longer included either. The 200 SMS messages included with first-generation iPhones will now cost $5 in an add-on package, making the total cost of ownership $15 extra per month versus current.

This isn’t so much a step backwards as it is a retreat to the mean, as these prices are consistent with AT&T’s offerings on every other smartphone. The truth is that the current industry model is mostly consumers’ fault. Wean yourselves off cheap hardware in exchange for limiting contracts! Pay more for your phones, keep them longer, and you will see price competition emerge and contracts become less restrictive and eventually disappear.

Noah June 11, 2008 · 9:53 am

Hate to say it, but majority of consumers what to get the latest device for reasonable price and have it active right when they leave point of sale.

Original activation method was inovative but it had its own issues.

Kevin June 11, 2008 · 12:01 pm

I held off buying the original but expected to buy the new version right away. The changes in the contract have me rethinking that. I’ll probably end up sitting it out and seeing if the powers that be come to their senses.

DS9Sisko June 11, 2008 · 12:14 pm

So, according to the logic of this article and Mr. Moffet’s analysis, “consumers” will have no choice at all in which phone by any maker other than Apple, any carrier other than AT&T or and rate plan anyone else offers because AT&T and Apple have set a pricing & subscription models that renders the consumer’s judgement obsolete?

Correct me if I am wrong, but if a consumer isn’t interested in an iPhone and/or AT&T it seems they have a number of options that are more in line with their wants and desires including the plethora of so-called iPhone killers and even more iPhone knockoffs. If you don’t like it, get something else.

And I say this as a very happy 1st gen iPhone owner with AT&T.

Rick A June 11, 2008 · 12:26 pm

So much for the ‘paradigm shift’ in the way US consumers get their cell phones and service. We’re right back to where we began.

I can see the monthly plan prices creeping up more and more.

And if I have an original iPhone, it looks like AT&T will be shafting me if I want to upgrade. Some things never change. Sorry, Steve, I may just wait this one out.

James June 11, 2008 · 12:27 pm

The non-inclusion of unlimited SMS with a unlimited data plan is just a way for AT&T to nickle and dime the consumers. If you’re already paying for unlimited data, there is no reason why SMS should be extra, because it’s data too.

Todd June 11, 2008 · 12:39 pm

It simply isn’t possible for a company to sell a cheap phone without recovering those costs from the subscription. High tech devices cost money to develop and manufacture. I’d like to buy a new car for $1000, but I understand that’s an unreasonable request. Companies need to make money; they’re not evil for doing so.

Jeff June 11, 2008 · 12:48 pm

DS9Sisko:

The problem is that in pretty much every other country in the world, there’s no need to “get something else” just because you want a different service provider. Nor should there be.

Think about it. Let’s say you’re a Time Warner customer and you want to switch to Verizon FIOS for your TV service. Would it make sense for someone to tell you that you need to buy a whole new TV set in order to do so, because only certain TV sets work with each television service provider? And that you then couldn’t upgrade your TV again for another 2 years without paying a penalty? Who would abide by such ridiculous rules?

Or what about buying a car that only runs on Shell gasoline?

Yet we buy products this way every day in the world of cell phone service, and unfortunately seem to have gotten used to it. What that means is there’s less competition both in terms of phones and in terms of service, since phones are only available on one service and once you have a phone, you’re not going to easily give it up to switch to another service (especially not given the penalties of switching before your contract is up).

So we *all* end up paying more and getting less compared with other countries. Look at Japan, where phones are not subsidized. The average phone is more expensive, yes, but there are many more of them available with a huge variety of features, the services offered by the carriers are much better in both features and quality, and you still *could* buy a cheap $50 phone like we have here if you wanted to. Most people just choose to spend more for more advanced phones (as with the iPhone here).

There’s no reason why phones should be subsidized and locked. It’s anti-consumer.

mark June 11, 2008 · 12:55 pm

Apple made AT&T try something new last year. But pundits, “experts”, and analysts pounded Apple and the high cost of $600 iPhone and the $2000 AT&T contract in the media. Even though the data plan was cheaper than data plans for other phones. Those pundits could’ve touted the benefit of the new process, with higher cost devices and cheaper, freer contracts, but there was nary a peep.

What else would you expect Apple/AT&T to do this year?

morten June 11, 2008 · 12:59 pm

have a look at europe.There you cannot lock a consumer for more than 6 months and the total price for phone plus 6 months subscription has to be listed as well as the price for a device without a subscription. This has increased competitionand greatly reduced prices. No wonder the providers want to prevent that from happening, but don’t say that choice isn’t good for the consumer. If at&t treats me bad i want an easy way out and change provider without paying for yet another phone. Again this forces better coverage, service and prices again something the providers don’t want to pay for more than neccesary. The current system prevents competition.

Jon Braeley June 11, 2008 · 12:59 pm

Apple tried but failed … to change the system. So if you cant beat’em, they joined’em. Shame really, as an iPhone buyer from day one, it felt great not to be locked in to the whims of your phone company.

Pete Mortensen June 11, 2008 · 1:03 pm

The premise of this article is fundamentally flawed. The old “unsubsidized” iPhone still required a two-year contract with AT&T and was locked from use by other carriers. This one at least gets you a discount in exchange for the same restrictions. Many people managed to circumvent this situation, but they did so without sanction. Apple’s been about the locked-down phone all along.

It is a shame that the iPhone isn’t sold unlocked by Apple for use wherever, but that ship sailed 18 months ago at the intro of the first one. Moffett seems like a typical analyst who engages in hype about some lost feature that never existed to begin with.

Carlo Pantera June 11, 2008 · 1:11 pm

AT&T is the limiting factor here. I like the iPhone, but have stayed with T-Mobile because I am in Europe and Asia a lot . . I get off the aircraft, turn on my BB and everything works every time. AT&T’s pricing plans for data are very expensive. If you want voice minutes, unlimited data and text, AT&T is absurdly expensive. The iPhone is not sexy enough against such high costs. But for voice, I think an iPod touch with MobileMe will be the rocket that launches. AT&T probably knows that when the iPhone is available to all carriers, they will lose big. But rather than designing programs against that day that will get and keep people, they are milking the short-term at the expense of the long term.

Steven June 11, 2008 · 1:19 pm

This quote is flat out wrong, “To offset that subsidy, AT&T’s consumer data plans for the new iPhone will cost $10 extra per month than for the unsubsidized, first-generation iPhone…” ALL 3G customers pay $10 more per month over EDGE network phones. The extra cost is for the faster network and is not limited to iPhone users.

And like DS9Sisko – if you don’t want to pay for tthe phone, don’t buy it. So many people feel like they are entitled to everything, but want to pay nothing. Greed is king apparently.

Nemo June 11, 2008 · 1:21 pm

In reality the new higher ATT costs are exactly the same as they charge for their other 3G phone plans. This is not an premium service fee for the iPhone.

Chris Hoofnagle June 11, 2008 · 1:23 pm

It’s totally a step backwards. We’re so conditioned to buying our phones with service, that we cannot see the possibilities that are opened when handset sales are untethered from service. This could include true price competition–where one could very easily hop from one provider to another, without dealing with new contracts, porting, etc. There’s also the opportunity for more privacy, in that one could buy a sim card without providing identification.

Curtis June 11, 2008 · 1:29 pm

I think the previous poster misunderstands the point of the story.

The writer isn’t saying a consumer’s judgment is obsolete. He’s saying that the consumer has no choice if they have their heart set on an iPhone.

In most countries, the choice of a handset and carrier are two very separate acts. A person buys a cell phone and then picks a wireless carrier. The downside to this choice is that handsets aren’t subsidized and are therefore more expensive. In the United States, the standard practice is that the cell phone is subsidized, making the phone very inexpensive or free. In order to make this happen, carriers recoup their costs through long-term contracts.

American carriers had started talking about moving toward the European model, with folks being able to bring their phones to a carrier, rather than having to purchase a new one each time they changed cellular provide.

For people who want an iPhone, the only game in town is AT&T in the United States. Although DS9Sisko says people can get a iPhone killer or knockoff (which is true), the people who want the true iPhone experience have to go with AT&T or go without an iPhone.

The fact of the matter is that there are some people out there who do not like AT&T for whatever reason, but still want the experience a true iPhone will give. Like with MP3 players, there are a lot of them out there, both killers and knockoffs, but there is only one true iPod. The same with iPhone.

CNET posted an interesting commentary today online. The writer said that by allowing AT&T to subsidize the iPhone and go without a cut of the monthly revenue might indicate a change in the Apple-AT&T exclusivity contract. The writer was speculating that this move is the first step in a loosening of the exclusivity agreement that will allow Apple to shop the iPhone around to other companies before the five-year exclusivity contract is up.

Rob June 11, 2008 · 1:34 pm

Choice in this case refers to after the contract is signed.

The new data pricing definitely makes me think hold off. This is a bad move in recession.

The frustrating part is that the new phone cost much less to make (see EETimes.com). So the new iPhone should have been less expensive even under the old model.

Gen 1 iPhones will be worth more if you can get the older lower rate.

Savard June 11, 2008 · 1:41 pm

Cell providers have one overwhelming vested interest in keeping devices married to their services, and that is competition. Should the consumer be empowered to buy any device they chose, and use it on any network they choose then cell providers would be left competing on the merits/prices of their respective services rather than riding the heels of device manufacturers.

Heaven forbid.

charlie June 11, 2008 · 1:55 pm

these comments are stupid.

1. locked into AT&T. Guess what idiots, in the US you only other choice in T-mobile. They don’t offer 3G, the iphone don’t have the proposed t-mobile 3g bands, and so will never work for it. This is a GSM phone.

2. Open vs. non-open. Open network access mean you can do whatever you want with the DATA. That is what in the bandwidth caps on the 3g usage? can you DL movies on your iphone, or use wifi? The inclusion of wifi makes the iphone open; at the end of the day you can bypass the AT&T network with a wifi connection.

3. Pricing. That is what people want — cheaper iphones. The problem isn’t “moving” to the Europe model. O2 already announced a FREE iphone with a contract. In general, what Americans want is MORE subsidy in return for a contract. How many people want to pay $1000 for an unlocked iphone?

4. Unlocking: it isn’t to use it on T-mobile, it is to use it overseas to avoid AT&T $1 a minute roaming charge. It remains to be seen how easy it will be to unlock the iphone 3G.

Anna June 11, 2008 · 2:00 pm

Is it true that you cannot tether your iPhone and laptop? The price of the AT&T data plan doesn’t bother me (although I prefer Verizon) but it’s not practical without the ability to tether.

George Woods Baker June 11, 2008 · 2:03 pm

This is a non-issue. It simply brings the iPhone into the same traditional model and pricing structure as all smart phones, so in that regard the field is now level. Furthermore, AT&T will charge a fee of $200.00 for early cancellation after 30 days which would then allow the user to move to another carrier if they so choose. This cancellation fee/penalty is no more than what the end user would have paid without the subsidy – so it’s a wash. Rate plans are now in line with all smart phones.

This new pricing model will promote wider use and therefore a growing 3G network. Everyone wins. There is no downside here.

Dutton June 11, 2008 · 2:12 pm

I would agree with the complaint wholeheartedly if Apple had decided to partner with Sprint, since they are so terrible when it comes to administering their service plans that I refer to them as an “un-company.” But AT&T runs a tight business, with reliable bills, decent customer service, and reliable coverage, so it’s not awful to have to go with them if one wants an iPhone.

For me the reduction in the up-front cost of ownership and the convenience of having the phone be working as soon as I buy it is worth the reduced choice. (I can remember running around Indonesia with a phone I had just purchased, unable to find a phone number available for it for 2 weeks. In the U.S. that would likely be more like 2 days, but nothing beats at the time of phone purchase.) However, best of all worlds would be if there was a choice available where one could pay the full cost of the iPhone oneself without having to be locked into a 2 year contract with a particular vendor. Then anyone who didn’t want the default AT&T deal could simply opt out and get a phone they have to activate themselves through a vendor of their choice.

nsk June 11, 2008 · 2:21 pm

I am waiting for Android!!!!

Todd June 11, 2008 · 2:21 pm

I am with Kevin… I held off buying the original iPhone, but expected to buy the new version. I also expected alot more features on the phone, MMS, zooming camera, etc. (Things that every other phone on the planet has). The updates they did make are cool, but not for the additional $15.00/month in service costs. I would rather pay the upfront high costs and have the lower monthly…that is what made the iPhone cooler than the damn blackberry and windows mobile devices.

The changes in the contract have me, like Kevin, rethinking going out to get this 3G model. THINK APPLE…THINK AT&T…you have a public that is willing to pay for the phone and update with the changes you make. Don’t lock us away for 2 years…you will loose money if next year Apple launches a wide variety of iPhones in the family…like they did with iPod originally.

— Posted by Kevin
I held tight for a year to