Is this Apple's long-term model for selling the iPhone?

Discussion in 'iPhone' started by marcol, Oct 4, 2007.

  1. marcol macrumors regular

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    #1
    Sorry if this has been discussed before.

    It used to be that (I'm talking from a UK perspective) we'd either:

    1) Sign a 12 or 18-month contract with a service provider (Vodafone, O2, Orange, T-Mobile etc) and get a highly subsidised phone. The phone would almost always be SIM locked to the provider, have carrier logos and awful carrier-specific (sometimes crippled) software/firmware.

    2) Buy an unlocked, unsubsidised phone and choose any contract with any provider (or use it with a non-contract SIM - 'Pay as you go').

    With the iPhone Apple (and it's partners) gave us a third option:

    3) A locked, unsubsidised phone only useable with an 18 or 24-month contract.

    Branding and crippling aside, this seems like the worst of both worlds (you have to have a contract but there's no handset subsidy to sweeten the deal) but I'm wondering if there isn't an upside too. Specifically, I'm wondering how upgrades will work. Let's say I buy an iPhone in the UK on November the 9th but then at some point before my 18-month contract with O2 expires Apple produce a much better, updated version (3G, more storage, GPS, whatever). Question is, will I just be able to nip along to the local Apple/O2/CPW shop, buy the new phone, take it home, swap the SIM in from my old iPhone, connect up to iTunes and be good to go - i.e no new contract need be signed?

    What brought this to mind was reading this thread started by Jade Cambell:

    http://forums.macrumors.com/showthread.php?t=364313

    Jade mentions that replacing a defective phone involves just that: take it home, swap the SIM connect to iTunes and iTunes asks 'do you want to replace the old phone with the new one on the same line?'

    I guess it's doubtful if anyone here will have a definitive answer to this, but any thoughts would be greatly appreciated. It seems to me this way of upgrading would be good for all concerned: I get the latest and greatest iPhone, Apple get to sell me a second phone during the contract period and O2 get a customer that's highly likely to extend his contract beyond the original end date (because that's the only way for me to keep using my new all-singing, all-dancing iPhone).
     
  2. Leemo macrumors 6502

    Leemo

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    #2
    Yep, that's how it will work. Since the phone isn't subsidised when a new iPhone comes out you can just bang in your sim card and carry on with a new 18/24 month contract from that date.

    -Leemo
     
  3. psychofreak Retired

    psychofreak

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    #3
    Disadvantages definitely outweigh the advantages of this...we don't know (do we?) the upgrade options at the end of the contract, with most phones its a free upgrade, but I doubt Apple will allow that...
     
  4. Leemo macrumors 6502

    Leemo

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    #4
    Nah you'll have to buy the 'new' iPhone when it arrives - it's pretty clear that's how it will work.

    -Leemo
     
  5. marcol thread starter macrumors regular

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    #5
    I'm tempted to think so too. A lot of stuff starts to make sense if you look at this way - the absence of subsidy, the brutal slap-down of unlocked phones, the use of special iPhone SIMs.
     
  6. kdarling macrumors demi-god

    kdarling

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    #6
    We also don't know what happens at the end of the contract.

    Will the phone be unlocked for you? Very doubtful.
     
  7. PDE macrumors 68020

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    #7

    In the U.S. it is clear that it will not be unlocked (from the iphone box text that states that ATT service will be required for phone functionality AFTER the end of the contract), but I wonder if Apple can get away with that in the UK. At least it seems that Apple is kind enough not to disable the ipod and wifi functionality after the contract is over if you don't want to continue with ATT. Very generous.
     
  8. Avatar74 macrumors 65816

    Avatar74

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    #8
    What makes you think the handset isn't subsidized? Just because Apple doesn't post a phony MSRP that hardly anyone will ever pay?

    The iPhone IS subsidized, but the subsidy works in reverse. All customers get the phone at a discount and then Apple capitalizes the difference through their share of the monthly recurring service fees.

    Someone estimated that given Apple's share, the full MSRP of the phone, were it offered, would be closer to $850. People will say that's not true by arguing about the features but since when has pricing been strictly about features? Especially with Apple... pricing is affected much more by supply, demand, brand image, uniqueness of the product, user experience, target demographics, etc. In that sense, $850 is about what I would expect a completely unsubsidized iPhone to cost the consumer.

    Sure, you can get the discount without Apple collecting the subsidy through AT&T... but Apple figured out a way to compensate for that. You get the hardware, but no rights to the software. Sure you might crack the phone and unlock it for use on any carrier, but in effect you void the warranty and save Apple some support expenditures.
     
  9. PDE macrumors 68020

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    #9
    This may or may not be the case (you don't know and we don't know), but if what you say about it being subsidised is true, then after the contract is over Apple should definitely unlock the phone - which it does not plan to do.
     
  10. Avatar74 macrumors 65816

    Avatar74

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    #10
    It is the case. They're not donating the proceeds from their share of AT&T's recurring to UNICEF.

    Subsidies generally work like this... the reseller (phone company) sells the phone at a discount from MSRP. The reseller then capitalizes the additional margin through a contract. These revenue streams are assumed to be guaranteed so they count them now, rather than later, and in accounting terms they recoup their cost plus margin on the phone. But in this model the reseller does the majority of the marketing and customer service. How many customers buy their Motorolas, Nokias and Ericssons through Motorola, Nokia and Ericsson retail outlets instead of the carrier?

    In Apple's case, Apple negotiated to give the phone to the reseller at a discount and capitalize the wholesale price themselves, partly because of Apple's brand clout, and partly because they're bearing tremendous additional cost of marketing and distributing the phone. Remember that Apple has retail stores that stock probably ten times AT&T's inventory of iPhones. The vast majority of iPhone sales are occurring at Apple points of sale, not AT&T.

    The cost of selling (and not just manufacturing) those phones includes payrolls, advertising, marketing, distribution, etc. that are not spread across subdistributors, wholesalers and rack jobbers... but ALL done through Apple's vertically-integrated structure. Even the technical support through AT&T is rerouted to Apple's call centers. So remember, as a manufacturer, distributor, marketer and retailer, Apple not only collects cost plus margin of manufacturing, but the cost plus margin of distributing, marketing and retail sales as well.

    So, in accounting terms, I bet you dollars to doughnuts that when Apple counts the revenues for their iPhone sales, they are adding contractually-guaranteed future revenue streams (their share of AT&T's recurring) to the revenue streams from iPhone sales, and counting it as one... not in the PR reports that report iPhone sales but in their 10-K and 10-Q reports that are filed with the SEC, where there's a high-level view of expenditures, revenues and EBITDA of their various business units.

    Movie studios do the exact same thing with royalties from DVD rentals and DVD sales... they use them in their own accounting (outside of boxoffice figures) to justify the budgets they allocate to films that might not actually recoup all their expenses if they relied solely on box office grosses.
     
  11. marcol thread starter macrumors regular

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    #11
    I don't know for sure and was thinking really of 1) the cost of the device and 2) those reported costs of components, e.g.:

    http://www.reghardware.co.uk/2007/07/06/iphone_part_prices/
    http://www.news.com/8301-10784_3-9773293-7.html

    Yes I do realise that there's a lot more to the cost of a device than just the components, but certainly if it is subsidised it's not subsidised as much as some phones (the upfront cost my Nokia E61 was £10 with T-Mobile's cheapest contract, whereas to buy it unlocked would have cost me ~£250; many phones are free with a contract). I'd be grateful if someone could say something more definitive on this.
     
  12. Avatar74 macrumors 65816

    Avatar74

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    #12
    Read my second post above for a more thorough explanation.
     
  13. marcol thread starter macrumors regular

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    #13
    I did, and I see what you're saying, and it's perfectly plausible. I'm just not quite sure where your certainty comes from - statements from Apple or AT&T, analysis of component and other costs and comparative analysis with other phones?

    Given the business model (where you are basically compelled to have a contract if the phone is to be of any use and there's no contract-free device with which to compare) these questions are tricky. To clarify, though, are you saying that at current prices ($400, £269) Apple would be making a loss on each handset if people bought them and never activated/signed a contract, or would they just be making less profit?
     
  14. Avatar74 macrumors 65816

    Avatar74

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    #14
    At least less profit... possibly a loss when you account for all the other expenditures related to the promotion, distribution, marketing and retail selling of the iPhone. One thing you have to keep in mind is that shareholders, employee bonuses, etc. are all depending on Apple meeting certain sales targets that they set forth when they did their sales forecasting. Those targets include gross margin. Bonuses paid to even the average Joe employee are dependent upon that. Also, the additional margin helps justify FUTURE projects for which fixed costs will be incurred before a dime is recouped.

    iPhone as a project has itself, like any other project, fixed costs that have to be recouped as well... The formula for total expenditures associated with a product launch, keep in mind, is not simply variable costs... That is, if Apple doesn't sell a single iPhone they've already incurred sunk costs associated with research & development, pre-launch promotion, distribution to retail centers, manufacturing the first run, etc. Only AFTER those fixed costs are recouped will they be able to actually account for any profit. They may already be in the green on it, but people often assume that if they sell ten iPhones their cost was only whatever it cost to build those ten iPhones... no. There's already millions, possibly even a billion, sunk into the 2.5 years of pre-launch activity that has already taken place.

    Put it this way... even in my company if a department wants to commission I.T. resources for a project, say $50,000... the fact that those I.T. guys are salaried doesn't matter. The business case has to cost-justify the expenditure by showing a return on investment within one quarter. The expenditures associated with a project aren't magically justified by revenues collected by other business units.

    And it's even more of a gamble when it's a new project like iPhone where there are no recorded historical revenues to justify additional expenditures. When Macintosh was a new project, Steve Jobs and Mike Markkula still had to go before the BOARD to get approval for the $750,000 budget they wanted for the Chiat/Day commercial that the board, by the way, initially rejected. They couldn't just say "oh, Apple has tons of cash flow we can afford it"... The business case has to actually justify all expenditures associated with the project by proving it can basically pay for itself without borrowing revenues from other divisions.

    There are also legal reasons for this but I'm not an expert in FASB regulations so I don't know all the intricacies... but basically there are accounting restrictions that would require them to show losses within the iPhone business segment if the overhead expenditures associated with marketing, promotion, distribution, retailing, etc. were not covered by iPhone's revenue streams, including their share of AT&T's recurring.

    I work in a similar environment where, as a financial analyst for Qwest, I have to deal with the idiosyncrasies of accounting for both one-time charges such as installs and CPE (customer premises equipment... routers, etc.) and monthly recurring charges. Those monthly recurring charges don't just get thrown into a pot and allocated anywhere. They are, accounting-wise, tied directly to the cost of supporting that particular customer or project.
     
  15. marcol thread starter macrumors regular

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    #15
    What I'm really wondering of course, as I said in the first post, is whether it's likely that if when Apple release a second generation iPhone it will be possible to just pay the handset sticker price and activate it on an existing contract or if a whole new contract will be required. Whether they make a profit or loss on the handset then becomes pretty important - if Apple make say a $50 profit on the handset then there's an incentive for them to allow that sort of upgrade, but if they're making a loss then obviously it wouldn't make any sense.

    You clearly know a whole lot more than me about this. Do you think these accounting regulations would preclude mid-contract upgrade, even if Apple were making a profit on each device sold?
     
  16. sananda macrumors 68020

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    #16
    o2 will not unlock the phone at the end of the contract. i had a conversation about this with a marketing guy at 02.
     
  17. gkarris macrumors 604

    gkarris

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    #17
    I don't think you can put a SIM card from an activated phone into an unactivated phone...

    You will have to go through the iTunes process again and then extend your contract out if you want a new iPhone...

    And, yes, the phone is UNUSABLE by any means without a contract....

    Welcome to Steve Jobs' new world of cellular phones...
     
  18. Fuchal macrumors 68020

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    #18
    But at least the old iphone will still be activated, and you can use it for other means. :D
     
  19. GreasyWeasel macrumors member

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    #19
    If that really is the case they are breaking the law in the UK. The law states that the carrier must provide a phone unlock once there is no outstanding subsidy for a small fee. The likes of Orange unlock your phone for a cost of about £10 once you are out of contract (ie you've paid for your free phone). If the iPhone isn't subsidised at all then surely under this law they must provide this service pretty much from the beginning of your contract.
     
  20. marcol thread starter macrumors regular

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    #20
    Are you sure? That's not what posters in this thread say:

    http://forums.macrumors.com/showthread.php?t=364313

    Putting the old SIM in and getting iTunes to enable the new phone on an old contract is how replacements are dealt with (according to the thread). Perhaps Apple does something their end as part of the replacement process?

    Has anyone bought a second phone (not a replacement) and tried to activate it with an existing SIM/contract without going through Apple's replacement scheme? (Perhaps not - it would be a bit of an odd thing to do).
     
  21. sananda macrumors 68020

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    #21
    can you tell where to find this? i've been trying find this out myself. i called ofcom and they said there was no such law and they only suggest a reasonable fee for unlocking.
     
  22. GreasyWeasel macrumors member

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    #22
    I'm sure I've read it here somewhere but can't find it any more. Someone had put up a very detailed post with reference links. Mind you I have read so much recently it could have been anywhere.

    I did find Oftel's FAQ which details their guidelines here

    Key points

    * SIM locking is permitted under current EU and Oftel guidelines as mobiles sold are subsidised - therefore it is allowable for the mobile companies to recover the associated cost of subsidising the mobile phones sold.

    * However, mobiles should be able to be unlocked once the subsidy has been recovered. This should generally be within a year if not before.

    * · Charging for the associated admin costs of unlocking a mobile is acceptable, but customers should not expect to pay more than £30 + VAT

    I think the key here is that Oftel/Ofcom allow the practice of sim locking phones so that the companies supplying the phones can recover their subsidy however if the iPhone isn't subsidised (which I doubt it is) then even if it's isn't law surely this would be grounds for Oftel to investigate.
     
  23. sananda macrumors 68020

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    #23
    Thanks for the link. if you go down to the bottom, it says:

    There are now no specific guidelines relating to the mobile companies' policies, in terms of the length of locking period and the charges for unlocking. Oftel decided that setting particular conditions for SIM locking would be less effective than customer pressure on the mobile companies: properly informed customers can select a provider bearing in mind the importance of locking restrictions to them, rather than Oftel setting.

    So i really don't think there is any law/rule/regulation that prevents o2 from refusing to unlock iphone.

    However, someone could ask ofcom to look into it again, since it seems a) iphone is the only phone which is not unlocked at the end of contract period and b) the phone is probably not subsidised.
     
  24. Avatar74 macrumors 65816

    Avatar74

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    #24
    Typical situation is that the contract is extended 2 years from the point at which the extension is made. I imagine that's what will be required in such a scenario. Sure they may make X profit by allowing you to upgrade on your original contract term but they make X + more profit if they require you to extend the contract 2 years from the date of upgrade... which is even more incentive for them.

    The regulations? Probably not. What precludes mid-contract upgrade as I've stated before is that they want the revenue you guaranteed them under the original terms. If you buy a new phone, at least you don't have to do the two year contracts consecutively... you extend the two year contract from the point of purchase which means they're eating some of their profit from the first contract.
     
  25. Leemo macrumors 6502

    Leemo

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    #25
    Well that's exactly what my post said - when you buy a phone it would start a new 18 month contract from that point.

    -Leemo
     

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