AT&T to subsidize cost of new iphone

[kdarling]

I thought the same thing about Apple still not allowing subsidies, until someone pointed out this quote in the last quarterly earnings call:

Shannon Cross - Cross Research: A couple of questions; the first, can you talk a little bit about what we are seeing with the pricing at some of your European carrier partners with regard to the iPhone? Who bears the cost on this? Is this something carrier driven? Any commentary you can make on that?

Timothy D. Cook (Apple COO): The carrier partners are free to price the iPhone as low as they wish and beyond that, I wouldn’t comment on the specific commercial arrangements between us and the carriers because those are confidential.

 

[Mikey B]

I'll be a grumpy old man with you, Mike B! I do want to ask about two things that you've said in this thread specifically:



Huh? I don't get it. What and why would they lose by doing this? It isn't as though all of the work being done by developers right now will automatically not work on the new iPhone. If I understand what you are saying, that's a rather large misconception.

What makes the most sense to me, as far as gaining the most market share, is that when you have two ground-breaking additions to your product mix, the 2.0 firmware and the 2nd gen iPhone, you space them out for a more lasting and substantial effect. You gain market share twice- instead of one big spike and a plateau you get 2 spikes and a higher plateau.

In fact, I would be willing to bet that given all of the media attention the next iPhone is already getting that the risk of loss actually lies in not introducing a new iPhone at the same time. "Yay, new software ... that I don't have enough room to put on my iPhone or a decent enough web connection to download and use. I think I'll wait."

Well, if you've jailbroken ever you know that app, at least those available through Installer and Cydia take up very little room. You can have page upon page of apps and not make a dent in your storage. Unless the "official version" of apps are dramatically larger, it's not much of a concern. Most apps are killobytes in size and even the largest are no bigger than a song or two.

I agree with you that Apple probably has built into the contract that, at the very least, AT&T cannot subsidize the phone in direct competition with Apple. That said, there have been good examples in this thread of how it could work in conjunction, for example a $200 rebate given as a part of the iTunes hookup process making it available to those purchasing it via Apple or AT&T.

What I would press you on is the "no business sense." Aside from experience and consistent business models doing exactly what is being rumored (i.e. a rebate for a new, expensive phone with a new two year contract), the financial basis is there for it to make sense.

I look at it this way- why lower the price of something when you don't have to? Why would Apple allow AT&T to virtually become a competitor? I don't think they would allow AT&T to force them into a position to loose sales and concede market share of their own product with another business. Other phones are subsidized all the time for a couple of reasons- their full retail price is artificially high and by offer a "deal" an illusion of value is created. We all know that the phone isn't worth the retail price, it's only actually worth what the "promo" or subsidized price is and are rarely if ever purchased without being subsidized. The customers know they aren't work, the service provider knows they aren't worth it, and the manufacturer knows they aren't worth the full price. How many people do you know that have bought a Samsung or Nokia phone at full-price unless they had to? How many people do you know that spent $400- $600 on an iPhone?

I think it was said with better eloquence above in this same thread, but simply put, getting someone who might otherwise not get an iPhone - and let's face it, then much less likely to go with AT&T - to purchase an iPhone and sign up for a two year contract is money in the bank. There is a tremendous base of customers who would decide to go with an iPhone after a surface $200 price drop, and that base of customers will bring a *%@&-ton of more money through their contracts than AT&T will actually 'lose' in offering a rebate. Bear in mind, the vast majority of cell phone company profits are from their contracts/monthly fees, not phone sales.

There's also a tremendous base of customers who would willingly drop hundreds upon hundred of dollars on an iPhone and pay a higher rate to have 3G. Does AT&T want to loose this gigantic pool of revenue if they don't have to? The costs, IMO, outweigh any benefit gained by altering the brand into the range of affordable (ie cheap) cell phones. The iPhone is one of the most popular devices ever created and has become an icon. Would the lack of a subsidy stop you, or anyone else, from buying the 2nd Gen?

But what it all comes down to is that we have no idea what's going to happen until it happens. There is a case for every angle.

 

[benmrii]

What makes the most sense to me, as far as gaining the most market share, is that when you have two ground-breaking additions to your product mix, the 2.0 firmware and the 2nd gen iPhone, you space them out for a more lasting and substantial effect. You gain market share twice- instead of one big spike and a plateau you get 2 spikes and a higher plateau.

I believe that it will be a tremendous letdown in so many ways to still be on a non-3G phone a year after the initial release which, by many accounts, should have had it then. Especially considering the average consumer... which is more exciting? The addition of new software opportunities and programs or a new, physical device with more obvious, simple to understand additions (3G... "It's faster!" GPs... "Know where you are!" More storage... "Hold more music!" Better camera "Take nicer pictures!" Video camera... "iChat to go!" etc.)?

Couple that with the Apple's desire to meet their sales goal by the end of this year and I think that is why the smart business decision is to release them both simultaneously.

More simply put: aside from Mac Nuts like us, who spend time posting on sites like these, and a relatively small amount of general smart phone users, I'd bet that most people are really looking forward to an iPhone 2.0 while 2.0FW's release, if not coupled with the new iPhone, will not even register with them. Particularly considering all of the mainstream press that iPhone 2.0 is getting right now.

Well, if you've jailbroken ever you know that app, at least those available through Installer and Cydia take up very little room. You can have page upon page of apps and not make a dent in your storage. Unless the "official version" of apps are dramatically larger, it's not much of a concern. Most apps are killobytes in size and even the largest are no bigger than a song or two.

You're likely correct there. That said, my point about not having enough space was really to balance the more important half: that lack of 3G will make 2.0FW considerably less viable because the iPhone is a "breakthrough internet device" that utilizes wireless connections extensively and is using a means that was years out of date when it was released.

The iPhone is one of the most popular devices ever created and has become an icon. Would the lack of a subsidy stop you, or anyone else, from buying the 2nd Gen?

I'd take your point a bit further in that while, yes, "there's also a tremendous base of customers who would willingly drop hundreds..." those customers will not decline to buy an iPhone if a subsidy is given. The customer base will only expand as it includes several others who either would not or could not buy it without. Will that all balance out the hardline profits on phone sales? No. Will it be a greater general profit to AT&T as it adds that many more people to two year contracts? Most likely, yes.

But what it all comes down to is that we have no idea what's going to happen until it happens. There is a case for every angle.

Yup... I still like blathering about it.

 

[winterspan]

What if...the price is $399 everywhere (both at the at&t and Apple online and retail stores), but you get a $200 rebate when you sign up for a 2-year contract through iTunes. The phone itself would be unlocked, but come with an at&t 3G SIM when purchased in the U.S.

That way at&t could claim continued "exclusivity" of the iPhone (carrier sales, "exclusive" rebate, bundled SIM, only service option thru iTunes), but anyone could buy the phone and use it on the GSM network / in the country of their choice.

Seems like this would solve most of Apple's current issues: unlocking/service debacles, cat & mouse games, worldwide iPhone black market, locking out large numbers of potential customers with other carriers -- and at the same time enabling them to do a true worldwide rollout of the 3G iPhone. Apple could even have similar arrangements with one or more carriers in other countries for that matter.

Just a thought, but it's what I would do if I were Stevie

I think you have the right idea, although I don't think the iPhone would be unlocked. It would still be tied to AT&T. but everything else is dead on, and what many had been discussing. It is the best way to block the unlockers from buying up cheap iPhones in the USA
and selling them overseas because of the weak dollar and generally cheaper pricing. Everyone end's up buying the iPhone at $200 over the final price of what Apple actually wants you to pay, and you get the $200 "rebate" when you sign the contract with AT&T. This gives legit customers a good deal, and extracts a premium out of the unlockers, which you'll never be able to stop anyways.

On a similar note, I never understood why AT&T and the other carriers were not subsidizing the iPhone when bought on a contract, as they do with nearly every other phone that is sold in the USA and Europe. It was rumored that Apple wasn't allowing them to do this for some reason, probably having to do with keeping it expensive for the sake of "exclusivity" and creating demand.
When they dropped the price to $399, I always wondered why Apple just didn't have AT&T subsidize the phone by giving a $200 instant "rebate" when people signed up for a contract. That would have allowed Apple to maintain the huge margins on the $499/599 pricing point.
Anyways, now more then ever, I think it's a good idea for Apple to let AT&T subsidize the $399/499 pricing down to $199/299 or even farther due to the state of the economy and energy costs. Although I'm sure that there are already millions of people waiting to jump on the 3G iPhone, Apple now has the opportunity to significantly grow sales volume by reducing the entry price to $200 via AT&T subsidization --- And WITHOUT EVEN HAVING TO REDUCE UNIT PROFIT. Apple keeps it's same unit profit, AT&T gets millions more new iPhone customers on expensive data plans with a small initial subsidy investment that is easily recouped, and legitimate consumers get a $199/$299 iPhone. IT'S A WIN-WIN!

 

[mccldwll]

When they dropped the price to $399, I always wondered why Apple just didn't have AT&T subsidize the phone by giving a $200 instant "rebate" when people signed up for a contract. That would have allowed Apple to maintain the huge margins on the $499/599 pricing point.

[Don't forget that AT&T was already subsidizing the iPhone by around $250 to $400 by the underpriced iPhone data plan].
That said, the above point deserves much more attention. There may have been difficulties structuring such a rebate with the subscription accounting model, while at the same time maintaining sufficient separate identities to avoid antitrust tie-in status. That's just a WAG, and depends on apple crediting at&t for that $200 rebate. It's entirely possible that apple dropped the price without such unlocking protections specifically to have it at a price point which would encourage sales for export. Millions of iPhones bought and unlocked for overseas use spurs sales and demonstrates demand as foreign contracts are negotiated. Even though apple has never been known for giving up margin to obtain market share, this may have been the exception. Plus with everyone tossing around a build cost of around $240/unit, dropping price to $400 just looked better. However, when the new round of 3G phones is rolled out, I wouldn't be surprised to see $100 price bumps, coupled with $200 activation subsidies. And there will have to be an upcharge for 3G data plan since not all areas have it.
And I do expect to see 3G phones before WWDC, with 2.0 apps (beyond the few which will be included on new phone) being the WWDC focus. That provides two PR events, and lots of free publicity. With the China Olympics in August, apple would want to have a full rollout worldwide before then. But who knows.

*The one thing I do know with certainty and without any reservations whatsoever, is that the originator of this thread's rumor, Scott Moritz, is a lying piece of pondscum who writes whatever hedge funds trying to move apple's share price tell him to write. He is never, ever to be trusted. Don't confuse Fortune.com with the reputable Fortune Magazine from years back. [Legal disclaimer: JMO]

 

[kdarling]

While a rebate plan sounds great in theory, it just wouldn't fly in real life.

Judging from forums, about a quarter of buyers are students and others who struggled to come up with the money to buy it. Coming up with $200 extra at sale time, just to get it back later that day, isn't possible for them.

 

[dehgenog]

While a rebate plan sounds great in theory, it just wouldn't fly in real life.

Judging from forums, about a quarter of buyers are students and others who struggled to come up with the money to buy it. Coming up with $200 extra at sale time, just to get it back later that day, isn't possible for them.

Who are you kidding?

If they have the money to sign up for another 2 years of $60-minimum service, that isn't a problem.

You already must have a credit card to do the whole iPhone thing legit.

 

[samab]

I thought the same thing about Apple still not allowing subsidies, until someone pointed out this quote in the last quarterly earnings call:

Shannon Cross - Cross Research: A couple of questions; the first, can you talk a little bit about what we are seeing with the pricing at some of your European carrier partners with regard to the iPhone? Who bears the cost on this? Is this something carrier driven? Any commentary you can make on that?

Timothy D. Cook (Apple COO): The carrier partners are free to price the iPhone as low as they wish and beyond that, I wouldn’t comment on the specific commercial arrangements between us and the carriers because those are confidential.

It all becomes "academic" after Orange France siad that everything is fine with the iphone sales.

O2 UK and T-Mobile Germany might have reduced iphone prices on their own --- without Apple's input. But that is all going to change with Orange France saying that iphone sales is fine --- but if Apple wants us to reduce prices, then Apple should reduce its revenue share (or kill it entirely).

Unless AT&T is really stupid, then that's the new tactic for AT&T --- if you want us to reduce price (i.e. subsidize the iphone), then Apple will have to agree to reduce revenue share.

 

[jareds941]

http://www.businessweek.com/technology/content/apr2008/tc20080430_591776.htm?link_position=link1

 

[Mikey B]

I'll be a grumpy old man with you, Mike B!

I forgot to say, grumpy old men rock!

 

[mccldwll]

http://www.businessweek.com/technology/content/apr2008/tc20080430_591776.htm?link_position=link1

That article too is a joke. It cites Moritz as a source, without contaminating the reference by actually putting Moritz's name on it. When you see that kind of circle jerk going on, walk away.

 

[Mikey B]

That article too is a joke. It cites Moritz as a source, without contaminating the reference by actually putting Moritz's name on it. When you see that kind of circle jerk going on, walk away.

"circle jerk"

 

[mccldwll]

"circle jerk"

All those guys have a habit of referencing each other in articles, and what starts as a rumor comes out as a fact (as demonstrated by Faux News story discussed earlier). That's happened with Munster's $/iPhone rev share, as well as the "five year exclusive" agreement which everyone believes is fact. It's not.

 

[Telp]

At this point im really hoping on this. This would work if your buying a new iPhone, even if you have an old one right? And you just have to sign up for another 2 year contract? I hope...

 

[winterspan]

Unless AT&T is really stupid, then that's the new tactic for AT&T --- if you want us to reduce price (i.e. subsidize the iphone), then Apple will have to agree to reduce revenue share.

I have to respectfully disagree. Although that would seemingly benefit AT&T, I highly doubt Apple would move an inch on the revenue share. And besides, AT&T doesn't need concessions from Apple in order to subsidize the iPhone and make it a winning proposition. We know this from the fact that carriers have been doing this practice since the introduction of cell phones. Some would say that the situation is a bit different due to the required revenue sharing with Apple, but they forget that the average iPhone subscriber brings in almost double the average monthly contract revenue. In light of that fact, a $100-$200 subsidiy on phone hardware is something that is easily recouped over the life of a 24-month contract.
Because of these circumstances, I don't see why AT&T WOULDN'T subsidize the iPhone, especially coinciding the new instant rebate with the launch of the much-coveted 3G iPhone. That would seemingly push the demand through the ROOF!

At this point im really hoping on this. This would work if your buying a new iPhone, even if you have an old one right? And you just have to sign up for another 2 year contract? I hope...

I doubt that AT&T would want to infuriate current iPhone owners by not offering a convenient upgrade path with a similar (possible) subsidy as new customers would receive. I would imagine that they would just make current owners extend their contract to recieve the discount, or at worst offer a smaller discount.

 

[BOSS10L]

Sounds like a great idea, but I must say that I'll believe it when I see it. As it stands, I've got no reason to upgrade my iPhone to something newer, because I don't need more space, it does everything else I ask of it adequately, with the only exception being A2DP. I'm giving Apple until the new iPhone comes out, and if they haven't given us A2DP on the old iPhones through a firmware revision or on the new iPhones as a native feature, I'm going to sell mine and find something that does.

I know I've beat this drum over and over, but this is just flat-out inexcusable.

 

[Mikey B]

I have to respectfully disagree. Although that would seemingly benefit AT&T, I highly doubt Apple would move an inch on the revenue share. And besides, AT&T doesn't need concessions from Apple in order to subsidize the iPhone and make it a winning proposition. We know this from the fact that carriers have been doing this practice since the introduction of cell phones. Some would say that the situation is a bit different due to the required revenue sharing with Apple, but they forget that the average iPhone subscriber brings in almost double the average monthly contract revenue. In light of that fact, a $100-$200 subsidiy on phone hardware is something that is easily recouped over the life of a 24-month contract.
Because of these circumstances, I don't see why AT&T WOULDN'T subsidize the iPhone, especially coinciding the new instant rebate with the launch of the much-coveted 3G iPhone. That would seemingly push the demand through the ROOF!




I doubt that AT&T would want to infuriate current iPhone owners by not offering a convenient upgrade path with a similar (possible) subsidy as new customers would receive. I would imagine that they would just make current owners extend their contract to recieve the discount, or at worst offer a smaller discount.

I want so badly to believe what you say has any merit or possibility of coming to fruition, but, IMO, I have a better chance of flapping my arms really fast and flying all the way to Cupertino to have Steve Jobs subsidize my new iPhone by giving me the one in his pocket. It's a simple tenent of retail, you don't discount your best selling products especially if they have a low margin. AT&T does not get the iPhone cheaply and they give up to 25% of the revenue they get from contracts to Apple. So do we really expect them to 1. Take a product with a low profit margin and further decrease that margin, or 2. sell the iPhone at full price and give a $200 dollar credit by another 7 - 14%? I don't see how either of those choices makes sense. Especially when many people are going to be willing the same if not higher retail price for the 2nd Gen iPhone and more for a 3G data plan.

 

[samab]

I have to respectfully disagree. Although that would seemingly benefit AT&T, I highly doubt Apple would move an inch on the revenue share. And besides, AT&T doesn't need concessions from Apple in order to subsidize the iPhone and make it a winning proposition. We know this from the fact that carriers have been doing this practice since the introduction of cell phones. Some would say that the situation is a bit different due to the required revenue sharing with Apple, but they forget that the average iPhone subscriber brings in almost double the average monthly contract revenue. In light of that fact, a $100-$200 subsidiy on phone hardware is something that is easily recouped over the life of a 24-month contract.
Because of these circumstances, I don't see why AT&T WOULDN'T subsidize the iPhone, especially coinciding the new instant rebate with the launch of the much-coveted 3G iPhone. That would seemingly push the demand through the ROOF!

You just have to look at how Orange France is talking about how great the iphone sales are in France and that there is absolutely no need for price reduction at this point in time --- that's like the biggest lie we have seen in a while because we all know sales have been a disaster.

4% of AT&T's subscribers are going for the $99 all you can eat unlimited voice plan --- that's a larger subscriber base than the iphone subscribers. And they are keeping the whole $99 and not have to share revenue with anyone.

Nokia can't hack it in the US market because carriers call the shots -- on handset pricing and on features. That's how American carriers do price subsidies.

 

[pitt1717]

man i'm on the fence now and not sure what to do. i signed up last week with att to test the network before i port over from verizon in anticipation for the new iphone in june. Now there's talks of subsidies? crap, do i return my phones or what!!!!
i haven't ported over yet and i guess i can eat the activation fees....what to do....what to do

 

[benmrii]

At this point im really hoping on this. This would work if your buying a new iPhone, even if you have an old one right? And you just have to sign up for another 2 year contract? I hope...

Not to say the same will be true if a rebate is offered for the iPhone, but the way this is typically handled with other phones is that if you are already in the midst of a two year contract you are able to sign a new two year contract in order to get a discount/rebate once the first year has passed.

 

[winterspan]

I want so badly to believe what you say has any merit or possibility of coming to fruition, but, IMO, I have a better chance of flapping my arms really fast and flying all the way to Cupertino to have Steve Jobs subsidize my new iPhone by giving me the one in his pocket. It's a simple tenent of retail, you don't discount your best selling products especially if they have a low margin. AT&T does not get the iPhone cheaply and they give up to 25% of the revenue they get from contracts to Apple. So do we really expect them to 1. Take a product with a low profit margin and further decrease that margin, or 2. sell the iPhone at full price and give a $200 dollar credit by another 7 - 14%? I don't see how either of those choices makes sense. Especially when many people are going to be willing the same if not higher retail price for the 2nd Gen iPhone and more for a 3G data plan.

The "simple retail tenet" is much more complicated than that. You don't discount your best selling product UNLESS you determine that you can make more revenue by increasing sales volume, and each one of those sales comes with 24-months of residual revenue. That is what I'm talking about. AT&T probably makes squat retailing an iPhone, but when they are signing up customers on a long-term revenue contract in which the average monthly plan cost for that particular device is nearly $100, they are putting a lot of money in the bank. Couple this with the fact that the United States market is definitely not used to paying upwards of $400-500 for a cellphone, and you can bet your ass they are considering subsidization, at least after an introductory period to spear the easy catches.

Additionally, as I said before, this is not a new practice, and it is even more popular in Europe. People wonder why the iPhone isn't breaking sales records over the pond. All you have to do is look at the normal phone subsidies:

T-mobile UK
Nokia N95 8GB ($625) = FREE on contract
LG Viewty ($500) = FREE on contract

O2 UK
Nokia N95 ($625) = FREE on contract
Samsung Soul (~$500) = FREE on contract
Sony K850i (~$500) = FREE on contract

Vodafone UK
Nokia N95 8GB ($625) = FREE on contract
Samsung F490 ($625) = FREE on contract
Sony K850i (~$500) = FREE on contract

You just have to look at how Orange France is talking about how great the iphone sales are in France and that there is absolutely no need for price reduction at this point in time --- that's like the biggest lie we have seen in a while because we all know sales have been a disaster.

4% of AT&T's subscribers are going for the $99 all you can eat unlimited voice plan --- that's a larger subscriber base than the iphone subscribers. And they are keeping the whole $99 and not have to share revenue with anyone.

Nokia can't hack it in the US market because carriers call the shots -- on handset pricing and on features. That's how American carriers do price subsidies.

I guess I can't really see what your point is. I'm also not sure what is up with Orange in France.

 

[samab]

I guess I can't really see what your point is. I'm also not sure what is up with Orange in France.

You don't need to know what's up with Orange in France --- you just need to know that SOMETHING is up. Same thing with O2 in UK, they priced their iphones below US prices --- basically allowing Chinese and Russian people to buy up their stock to be exported overseas (thus of course O2 sold out their iphone stocks).

Do you think that AT&T is going to NOTHING when every other iphone carrier is doing SOMETHING?

You said that you don't think Apple is going to move an inch about revenue share --- but that's not true when Apple has been saying that they are not married to that business model anymore. This is what Orange in France is basically are doing --- let sales numbers suffer to a point that Apple will have to come to the negotiating table to revise the revenue sharing terms. This is what O2 in UK is doing with all the end-of-life talk and not stocking any more 2G iphones.