Let's assume that the 5-year exclusive is legit. It might as well be, for all I know. What I'm having trouble wrapping my head around is why the exclusive would benefit Apple after one or two years.
- AT&T subsidizes the iPhone. Isn't that par for the course with any cell phone, regardless of exclusives? In other words, if it wasn't exclusive and was available on all North American networks, wouldn't they all be subsidizing it anyway? Every phone I've ever bought was subsidized in some way because that's how they get you to sign contracts.
- Let's assume (because I don't know) that AT&T is subsidizing the iPhone more than others (let's say $200 instead of $100). Is that going to attract more customers to AT&T than Apple is losing by not offering their phone to the rest of the GSM and CDMA customers in North America?
- We know that revenue sharing is over, so Apple's not getting that out of the deal any more.
I'll respond.
Let's start with your second point. Today's
analyst information surmises that AT&T is subsidizing Apple between $325 and $425 per iPhone handset. The $425 figure is based on new subscribers to AT&T with the requirement that the new subscriber joins in an Apple retail store. I
guessed earlier this week that AT&T may be subsidizing as high as $500 per unit based on the non-contractual PayGo phone prices being offered outside the U.S. One thing is clear, the exclusivity agreement allows Apple to sell a very high priced phone for a very low price while still making the margins they want.
Now your first point, the AT&T subsidy is much higher than expected with the added benefit of a commission for new subscribers. Giving AT&T the exclusive gives Apple the ability to make good return on the handset while offering a price at and sometimes below the competitors. Most of those competitors will need to lower their cost to the carrier to get the same price points, thereby undercutting their own revenue. As has been stated by AT&T, they're losing money on the iPhone project for the next two years. They are not getting extra subscriber money for the iPhone, it's the same as it is for any AT&T smartphone. Their goal is more subscribers and more premium subscribers at that.
Your last point. As you can see above, Apple is still making money off AT&T, more than the average phone manufaturer. Most contracts are renegotiable at certain points in the contract, obviously that requires both sides to agree that they're getting what they want. Assuming the iPhone build cost is similar to the cost the first iPhone, more components but cheaper prices, AT&T is giving Apple $125 per handset or $225 per new subscriber above previous retail. This would be $5 per subscriber and $9 per new subscriber (upfront) which is near
Piper Jaffray's initial estimate of $3 and $11, but not his later estimate of $18. Either way, I'm sure Apple is getting what they want out of the deal, even if that means less money and more units. More units means more people who will stick with the iPhone upgrade cycle.
I guess it just seems unlikely to me that either company is gaining enough from a 5 year exclusive to make it worthwhile for both of them. At some point long before 5 years is up, you would think that AT&T will have snared pretty much anybody who is going to switch for the sake of an iPhone. In fact, after a year of these subsidies, what more will it take to get somebody to switch? Just seems like diminishing returns for both companies after that.
The iPhone is the iPod of the phone world. Whether or not we think it's true, the mainstream media and iPhone carriers treat it as such. With that comes a new generation of non-exchange, non-Blackberry smartphone owners - "the rest of us." iPhone is the crossover device which will take AT&T's $45 subscribers to $75 subscribers. AT&T's business model requires that they have the infrastructure as long as one subscriber uses it. Therefore, the operational cost remains relatively the same whether there are 10 data subscribers or 10,000 data subscribers. Switching voice customers to data customers is mostly profit and very beneficial to AT&T - the iPhone is the best device on the market to spur data plan upgrades. Every carrier is benefiting from the smartphone attention, but the iPhone is the true catalyst. AT&T is the exclusive carrier of the next "iPod" and with 250 million wireless subscribers in the U.S., they have a long way to go. As for Apple, AT&T is giving them exactly what they ask for, AT&T provides the services and implements new ones specifically for the iPhone and Apple builds the phone the way they want.
Apple was clearly asking for a lot when Verizon turned them down. They're still getting everything they asked for from AT&T in one form or another. They've changed to a subsidy plan that the public is more familiar with but the money is still changing hands in the background.
