AT&T pricing structure

Discussion in 'iPhone' started by carotene, Nov 29, 2008.

  1. carotene macrumors newbie

    Nov 29, 2008
    Hi All,

    My first post here. I’ve lurked for a bit. I wanted to post my thoughts on AT&T’s pricing structure and how it relates to the iPhone and iPhone 3G. This will be obvious to some, but I hope others find it useful. I am not affiliated with AT&T in any way. I am a 10 year customer. I'll update info and corrections in this post from comments deemed credible.

    Every phone bill is comprised of the following components:
    Total Bill = [overhead] + [taxes & fees] + [subsidy] + [profit]

    Overhead is the cost of doing business per customer. This encompasses all the expenses the company must pay including staff, infrastructure, retail outlets, etc. Costs incurred dealing with deadbeat customers also fall into this category as discussed below. How these costs are divided across AT&T’s national customer base per account type is unknown to me.

    Taxes & Fees
    Government mandated fees and taxes. Uncle Sam wants his cut.

    So let's now look at both the subsidy and profit portion together because they are definitely not mutually exclusive.

    Subsidy is the portion from each bill that reimburses AT&T for your shiny new cell phone you received at a discount or even "free".
    AT&T's cost to provide you a new phone varies by phone make/model and discounts/rebates offered. If AT&T buys Motorola Razor phones in bulk quantities at $115 each and offers them for "free" with a signed 2 year contract, that $115 must be recouped within the next 24 months. It’s likely that this is not a fixed sum from each bill. I would not be surprised to learn that early in the 2-year contract, the subsidy component comprises the majority of the Subsidy+profit portion of the bill. If AT&T recovers their cost for your phone as soon as possible it minimizes risk. The ratio of subsidy to profit is also not fixed and cash flow can be adjusted if necessary. For example, if you stop paying your bill, profits from your account can be used to cover the phone subsidy.

    Handing an expensive piece of equipment over to some random Joe, even with credit check, is risky. Enter the early termination fee (ETF). The ETF legally guarantees recovery of their cost for the phone they gave you for “free” and any administrative costs incurred to setup and close your account.

    Should you bail on your contract and cancel your credit card, AT&T will send you to collections for the ETF and ding your credit. However, this may not result in recovery of the $115 they coughed up for your phone. If you waited 6 or 8 months before turning into a deadbeat, AT&T may have already been reimbursed for the cost of the phone, or close to it. Though they may have to shift all of the profit made on your account to the subsidy component to do so. Not to worry though, if money is still owed the paying customers (AKA you) will cover it.

    Given the above assumptions it's a certainty that AT&T has recovered the phone cost in a few months, albeit with no profit. At some point in the contract, the subsidy component goes to $0 and the subsidy+profit portion of the bill becomes all profit. How much profit AT&T gains from an account from this point forward until another subsidy (AKA upgrade) is offered is purely at AT&T's discretion. Profit, of course, is the good stuff (for AT&T) and they want to maximize it – as they should.

    1st Gen iphone customers bought an unsubsidized phone. This was a sweet deal for AT&T. From day 1 of the contract, the subsidy portion of the bill was $0. All profit, no risk (neglecting administrative costs). It’s possible AT&T gave a little bit back to the customer. Perhaps in the form of a discount on the data plan for example. To be sure, this was part of Apple and AT&T’s negotiations. BUT, AT&T still had a hefty ETF. Talk about gravy on top! iPhone customers owned their phone from day 1 so AT&T only had to cover their administrative costs if a customer walked away. Yet, iPhone customers were contractually obligated to hand over $175 if they walked away. Amazing.

    The 3G iPhone was released as a subsidized product. It’s estimated on blogs and other forums that AT&T subsidizes about $200 of each iPhone sold. I’d wager it’s a bit less, but whatever. Either way it’s a heavily subsidized phone.

    I would argue that in the context of the subsidized pricing structure, the 3G iPhone is the better deal compared to the 1st gen iphone. iPhone 3G customers are definitely higher risk for AT&T. With risk comes cost (ask your insurance agent) Also, AT&T must recover a large subsidy which takes more billing cycles than some of the cheaper phones and a contract of some length is justified. AT&T increased the data fee to help recover their costs faster, but at least the ETF is based somewhat on reality.

    - phone and data services cost the same regardless of the amount of phone subsidy provided by AT&T. It’s a better deal for the customer to opt for a phone with a large subsidy.

    - In an ideal world there would be no subsidies for phones. The customer would bear 100% of the phone cost up front, significantly reducing the risk to the phone company. And remember, YOU pay for AT&T’s losses due to deadbeat customers. That’s covered in the overhead portion of the bill. Service costs would be lower and ETFs could possibly go the way of the dinosaur as well.
  2. George Carlin macrumors regular

    George Carlin

    Oct 8, 2008
    This is one heck of a FIRST POST

    As Abe Lincoln said " I'm sorry I wrote such a long letter, I didn't have time to write a shorter one"
  3. eplchamps0304 macrumors 6502a


    Jan 31, 2008
    I dont get the point you are trying to get across?
  4. carotene thread starter macrumors newbie

    Nov 29, 2008
    Alas, the art of brevity escapes me. :D
  5. abijnk macrumors 68040


    Oct 15, 2007
    Los Angeles, CA

    Nice post nonetheless. Hopefully it will do some good helping the whiners understand why they pay what they pay.
  6. GoCubsGo macrumors Nehalem


    Feb 19, 2005
    Unfortunately, this will really chap some people's hides ... but I think this should be a sticky. Albeit from a "newbie". If not to showcase that not all newbies are here to ensure their first 10 posts are riddled with dbag comments or general stupidity, but to show people what they're paying and why.

    There are far too many posts around here bitching about their AT&T bills and how they don't understand. Call me old school or just old, but I generally find it easier to seek assistance from the company who is billing me rather than an online forum. ;)

    On a side note, care to explain the Southern California Edision pricing structure to me? :p (I am joking ... please don't because I don't care.)

    Thanks OP for putting this out. To all who are missing the point, the point is to explain why the billing is the way it is and perhaps give the kids insight into how much they'll truly pay for their new toy.
  7. carotene thread starter macrumors newbie

    Nov 29, 2008
    Thanks for the kind words jessica. The apple fanboys are no match for the regulars on some of the car forums. They don't scare me :)

    I've been interested in the iphone for a while so i've been researching on the forums. I saw a lot of confusion about pricing when the 3G came out and didn't really see any posts since then that clarified why AT&T did what they did. I should note that I strongly disagree with the subsidized model. ATT is a telecom company not a hardware company. They should focus on what they do best. Release specs of conformity for their network and let the hardware companies do their thing. Everyone wins. But i digress. :)
  8. kas23 macrumors 603


    Oct 28, 2007
    You said that the ETF basically covers the subsidy + a small amount of overhead. I don't quite agree with this. It seems more like an insurance policy (to insure them some profit) or deferrent to keep people from walking away. My reasoning is this; 1st generation iPhoners still had an ETF even though they received no subsidy. 2nd reason; if I wanted to walk away right now from my 3G contract, I would have pay the subsidy back to AT&T AND pay my ETF. Therefore, it seems a bit too simplified to say that paying an EFT equates to paying the ETF since for 1G iPhone you still had to pay an ETF when you never paid subsidy to begin with and for 3G, you have to pay back subsidy AND ETF is you walk.

    It seems to me, that even if cellphone companies decided not to pay subsidies anymore, they are not likely going to stop collecting ETFs.
  9. nickspohn macrumors 68040


    Jun 9, 2007
    Fantastic first post. Ignore the other's bad comments, this is useful and is good.

    Please stay active on the forums.

  10. anjinha macrumors 604


    Oct 21, 2006
    San Francisco, CA
    Things are really different with the carriers here. Most phones here aren't subsidized, usually we pay the phone's price upfront. Usually we don't have any sort of contract either.

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