iPhone 3G S pricing kerfuffle shows phone subsidy not widely understood

Current iPhone 3G users are up in arms about not getting the same discounted iPhone 3G S price as new customers would. Their argument is that AT&T should be “rewarding them” for being loyal customers. Man, I sure wish the world worked that way. I’ve been a “loyal customer” of Time Warner High-Speed Internet for over 6 years and my monthly plan keeps going up, not down, even as infrastructure upgrade costs fall. I’ve been a loyal customer of Apple for years too, and don’t get any special discount on my next MacBook Pro simply because I’ve bought one before. And phones don’t work that way either.

I wonder if the current spate of anger relates to two things: 1) a conflation of the general hatred being levied towards AT&T right now over their completely craptastic reception and service, and 2) a new market of iPhone 3G owners who have never previously purchased a smartphone, and thus don’t have much direct experience with how cell phone subsidies work in the U.S. and on carriers around the world. The actual cost of a smartphone device as sophisicated as an iPhone or G1 or Nokia N97 et al is many hundreds of dollars — I tend to think of it like “car trouble” price: whenever something goes wrong, I steel myself to be out $500-600 no matter what the heck it is. Some phones climb as high as a cool $1k for an unlocked GSM handset. The only reason smartphones can be had cheaper is because the carrier subsidizes them: you agree to be locked in to this 2-year contract and the carrier is guaranteed to extract $XXXX from you over that period, in exchange for which they discount the price of your phone because they’re guaranteed to make that money back from you (unless you cancel early, which people seem loathe to do even though a $150 early termination fee (or less, depending on how much of the contract has elapsed) is far less than you’d pay to stay stuck in the contract… maybe it’s the principle of the thing).

Thus, if you want to pick up a new phone before you’ve completed that 2-year contract you signed, you’re just plain SOL. There is no special deal for you, and if there were the whole phone subsidy house of cards would fall apart. What would stop me from popping in every month to pick up the latest hot smartphone on deep discount, and what incentive would carriers have to support that?

What these folks are really angry about is the underlying racket of the phone subsidy. It’s spurious to blame Apple or AT&T for “allowing” this pricing scheme — this pricing scheme is typical for the mobile market. Still, neither Apple nor AT&T have done much in the way of educating a First Time Smartphone Buyer market about how this works, and they could have softened some of the blow if they had. Nevertheless, it’s a rude but entirely fair wakeup call to phone buyers about how the subsidy system works.

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  1. #1 by Christina Warren - June 13th, 2009 at 09:39

    I couldn’t agree with your post any more. I feel for people who are seem genuinely confused/confounded that this is how phone subsidies (smart or otherwise) work, but it’s been like this for as long as I can remember. Now, granted, I’m a lot more familiar with how the cell phone industry works than most people. I got my first personal cell phone for my 17th birthday back in November 1999, but my parents both had cell phones or car phones in the 1980s (think bag phone). In high school and college, I worked at Best Buy and although Digital Imaging and Computers were where I spent the bulk of my time, I did do two stints in Wireless (once as a department supervisor), so I know how the activation process works for all major carriers and how contracts, subsidized prices, new line upgrades, existing customer upgrades and new customer prices/contracts all work.

    If anything, AT&T customers have an advantage over most other carriers, in regards to the iPhone. Typically, unless you have multiple lines on the same account, you get the good phone deal ONCE — when you sign-up for that carrier. Other upgrades are NEVER as good as they are for first time customers. They might come close, but they are never as good. At least with the iPhone 3G S, customers can upgrade 6-months early at the new-customer price. And it isn’t like that existing iPhone 3G, assuming it is still in working condition (even better if it has Apple Care) won’t fetch at least $200 on eBay for customers who aren’t at an upgrade point in their AT&T contract.

    I think a lot of it is the general dissatisfaction with AT&T, and that’s totally deserved. I’ve put off buying an iPhone for the last two years because I hate them so much (well, my hatred actually goes back to Bell South Mobility before they officially became Cingular — I switched to Powertel, now T-Mobile in January 2001 and have had no complaints). I’m grudgingly going to pay $100 to ETF with T-Mobile so I can get an iPhone 3G S, but if my BlackBerry didn’t suck so hard, that would be less of an easy solution.

    Anyway, before I get all TL:DR, you rock, and spot on!

  2. #2 by fabrini - June 13th, 2009 at 10:29

    The mobile providers need to eliminate subsidies. When people have to pay full price for phones, then the phone manufactures will start to lower their prices to what people can actually pay. Without subsidies, there is no need for contracts, without contracts there is true freedom.

    Oh wait — now I guess we know why there are subsidy. Reminds me of something….. oh yeah. The f’ed up healthcare system in the US.

  3. #3 by JP - June 13th, 2009 at 10:59

    How dare you come into my internets and make all of this “sense”, with your “logic” and your “reason”.

    I have no time for this. I’m building my AT&T logo effigy for tonight’s rally!

    To be fair, the service and reception are terrible and people have every right to be annoyed/upset about that. I was initially bummed about the non-subsidy on the 3Gs, but once I thought about it, I understood.

  4. #4 by Turner - June 13th, 2009 at 12:10

    You’ve summed it up very well… I’m looking forward to swapping out my BB Curve for the 3GS next week, and am fully aware that I’ll be signing up for a 2 year contract. It’s just the way it goes, people…

    Apple will continue to release a new phone every year, it’ll just cost more cash to be a continued early adopter.

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