Next Gen iPhone = No Upgrade Price?

chrmjenkins said:

No, I'm talking about how volume relates to profits.

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True, but your reply was to a comment concerning a subsidy.

chrmjenkins said:

Big stores like newegg, amazon and wal-mart move a lot of products. Therefore, they can afford to make a slimmer profit on each product sold since they sell so many.

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The facts are true, but the reasoning is backwards. As it is stated above, the assumption is they move a lot of products and the consequence of such is they sell each item for a smaller profit margin. Conversely, they price items such that they make a smaller profit margin therefore they sell more products due to the law of demand.

chrmjenkins said:

For subsidies, I've already stated how we don't have enough info, plus see below.

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We do have enough to make reasonable estimates, however. The maximum operating costs per customer is $40 per month (the price of cheapest plan available). The actual operating costs are certainly lower, but this works for the time being. How do we know they can't be more? This value represents the point at which the baseline customer provides no profit to AT&T and serves only to increase network demand (increasing costs and degrading service). The only exception would be if this service was priced as a loss leader, but for various reasons that can not be true. Now, we can figure the subsidy cost for AT&T is $200 per iPhone since that is the difference between the upgrade and non-eligible upgrade pricing. Finally, a $100+ plan is upgrade-eligible every year, so:

($100 price -$40 cost)/month * 12 months - $200 (subsidy) = $520 profit

This is the minimum profit AT&T makes over the course of this upgrade period and is over two and a half times the initial investment. Over the course of the full contract it's over six times their subsidy cost! To determine the time it takes for them to make up the cost of the subsidy,

$200 / ($60 /month) = 4 months (fractional months are invalid as payment is a step function)

Again, this is the maximum amount of time it will take to repay a subsidy when qualifying for yearly upgrades. The cheapest iPhone plan profits only half as much and will therefore take no more than 7 months to repay. Of course, these accounts are only eligible for upgrade every 18 months. Realistically, the operating cost per customer is probably somewhere in the $20-$30 range, meaning AT&T profits 3 to 4 times the subsidy before customers are upgrade eligible.

Eso said:

True, but your reply was to a comment concerning a subsidy.



The facts are true, but the reasoning is backwards. As it is stated above, the assumption is they move a lot of products and the consequence of such is they sell each item for a smaller profit margin. Conversely, they price items such that they make a smaller profit margin therefore they sell more products due to the law of demand.

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These are intertwined (subsidy, profit, and demand). I have no contention with your analysis. My comment was only meant to illustrate keeping the subsidy for returning customers would drive demand and hence, profit.

We do have enough to make reasonable estimates, however. The maximum operating costs per customer is $40 per month (the price of cheapest plan available). The actual operating costs are certainly lower, but this works for the time being. How do we know they can't be more? This value represents the point at which the baseline customer provides no profit to AT&T and serves only to increase network demand (increasing costs and degrading service). The only exception would be if this service was priced as a loss leader, but for various reasons that can not be true. Now, we can figure the subsidy cost for AT&T is $200 per iPhone since that is the difference between the upgrade and non-eligible upgrade pricing. Finally, a $100+ plan is upgrade-eligible every year, so:

($100 price -$40 cost)/month * 12 months - $200 (subsidy) = $520 profit

This is the minimum profit AT&T makes over the course of this upgrade period and is over two and a half times the initial investment. Over the course of the full contract it's over six times their subsidy cost! To determine the time it takes for them to make up the cost of the subsidy,

$200 / ($60 /month) = 4 months (fractional months are invalid as payment is a step function)

Again, this is the maximum amount of time it will take to repay a subsidy when qualifying for yearly upgrades. The cheapest iPhone plan profits only half as much and will therefore take no more than 7 months to repay. Of course, these accounts are only eligible for upgrade every 18 months. Realistically, the operating cost per customer is probably somewhere in the $20-$30 range, meaning AT&T profits 3 to 4 times the subsidy before customers are upgrade eligible.

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Completely agree, and that's why I find it difficult to believe they would be taking a financial hit by retaining the subsidy for all customers. Of course, I suppose a million people could run out and buy the old iPhone with only a month to go, but AT&T had no problems with establishing date guidelines that were specific to the iphone last time.

Who cares how much it will cost.

Money, you can't take it with you!

OrangeDog said:

Who cares how much it will cost.

Money, you can't take it with you!

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Well people do care.

OrangeDog said:

Who cares how much it will cost.

Money, you can't take it with you!

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You must not have a spouse and/or kids.

nickspohn said:

The next iPhone won't be subsidized and will see high pricing just like the first gen iPhone. There is NO other good way of doing this that will get profits to AT&T/Apple. There will be no special pricing for people who bought the iPhone 3G the first day it came out. Why? What about the people that bought a month later? They signed a 2 year contract and that is that. Apple knows this. Anyone who bought the iPhone 3G upfront probably had the first iPhone too, and will always upgrade.

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I disagree. Are there any stats on how many people stuck with the first iPhone? Because honestly, every single person I know who bought the first iPhone still has the first iPhone - I don't know anyone who upgraded to the 3G. I think AT&T actually has a pretty good cycle going here. First, they got new customers who bought the original iPhone. Some of those customers were already with AT&T, but many of them weren't, and signed a new contract, which was probably a 2-year contract (even though the phone was not subsidized) simply because that's what AT&T offered. Then, a year later, the 3G came out, and a vast horde of customers locked themselves into a 2-year contract to get the subsidy. Now, this summer, those original iPhone users are going to have the option to upgrade at a good price, and many of them will jump on it. And in 2010, the 3G customers will be eligible to upgrade again. I think AT&T has two separate sets of customers who are eligible to upgrade every other year, so basically as long as they offer anything new every year, a large chunk will be willing to upgrade and lock in for another 2 years.

fwiw, I know a total of 2 people who had the original iPhone and both of them upgraded to the 3G. The only reason I could see people not upgrading from the original iPhone to the 3G is if they use their original on T Mobile.

@tlbwriter - that is, assuming an iPhone user will always go and get another iPhone. I can definitely see some 1gen iPhone users going in for the Pre, or maybe one of the new Android handsets which will have been released by the time iPhone 3.0 is released this summer.

tlbwriter said:

I disagree. Are there any stats on how many people stuck with the first iPhone?

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Well, lets see what happens...

https://forums.macrumors.com/threads/654432/

Im set for yearly iPhones. My wife has a 1st gen and loves it and i bought a 3g in July. So this summer ill use her upgrade and get the new iPhone this summer, then the following summer she will use my upgrade from my 3G. Its a perfect system.

Gotrpms said:

Im set for yearly iPhones. My wife has a 1st gen and loves it and i bought a 3g in July. So this summer ill use her upgrade and get the new iPhone this summer, then the following summer she will use my upgrade from my 3G. Its a perfect system.

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Man, that's a sweet little deal you got goin on there. New iPhone every year for you two, nice!

I'll be selling my 3G iPhone on eBay like I did last time. I got over $500 for my 8GB iPhone last summer, lol. But that thing was, I had to pay full price for my 3G iPhone, sooo $400 down the drain for a new phone, but I still had over $100 left to do whatever with it!

nfl46 said:

I'll be selling my 3G iPhone on eBay like I did last time. I got over $500 for my 8GB iPhone last summer, lol. But that thing was, I had to pay full price for my 3G iPhone, sooo $400 down the drain for a new phone, but I still had over $100 left to do whatever with it!

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The problem is (I think) is that the original iPhone could be easily unlocked and used on T Mobile or other GSM carriers. Can the same be done for the 3G?

Im Hoping O2 will do theyre Upgrade plan like last year, which basically ended the contract early, but you had to get the 3G, pretty sweet deal as it was £160 for a 16Gb, and you saved at least 6 months of the contract, if its the same this July, i will save 10 Months, get a lovely new iPhone, and be able to sell my 3G for Profit to pay for a few months of the phone!

kas23 said:

The only reason I could see people not upgrading from the original iPhone to the 3G is if they use their original on T Mobile.

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Well, I can see a lot of people deciding the difference between the original and the 3G wasn't worth $200 or $300.